Bob Evans to Offload Mimi's Cafe

Bob Evans Farms Inc. (BOBE - Snapshot Report) recently inked an agreement with LeDuff America to sell its French-themed casual dining restaurant chain Mimi's Cafe for $50.0 million. Of the total consideration, $20.0 million would be paid in cash and $30.0 million in notes. Bob will provide certain transitional services to the acquirer for up to one year.

Last November, Bob Evans – the parent company of Mimi's Cafe and its namesake brands -- had engaged an investment banking firm specializing in the restaurant industry to evaluate the strategic alternatives related to its Mimi’s Cafe business segment and optimize the company's asset in the segment accordingly to enhance shareholder value. The latest deal is the outcome of that engagement. The deal is expected to be sealed within the next one and half months upon the fulfillment of customary closing conditions.

Why Mimi's Cafe?

Mimi's Cafe's 145 units in 24 states contribute around 20% of the company’s total revenue. The chain has been struggling for the last few quarters. In Bob Evans’ latest reporting quarter, the second-quarter of fiscal 2013, Mimi's Cafe’s comps plunged 5.6% which resulted in a 4.7% decline in total sales. Mimi's Cafe's adjusted operating loss was also wider than the prior-year period.

For the upcoming third quarter, management expects to post adjusted earnings in the range of 51—57 cents per share that includes yet another underperformance at Mimi's Cafe mainly due to lesser focus on the brand resulting from the announcement of the strategic review process.

Strategic Deal for Both Parties

On the other hand, the buyer LeDuff -- a U.S. based subsidiary of France-based global bakery and restaurant company Groupe LeDuff SA -- owns and operates a wide portfolio of cafe-bakeries, coffee houses, boulangeries and related manufacturing units in North America. Consequently, we expect both companies to derive operating synergies from the deal as both of them operate in the same vertical.

Probably, the Mimi's Cafe concept did not resonate well with the parent company Bob Evans’s long-term operational strategy. As per Bob Evans management, casual dining segment’s average exposure to alcohol is 10% while Mimi's Cafe, primarily focusing on lunch and dinner day-part commands only 3-4% share. This was due to the lack of significant bar exposure of the parent company Bob Evans.

We believe that after the transfer, Mimi's Cafe will be well handled as its new owner LeDuff has a proven track record of operating a variety of renowned eatery brands including La Madeleine Country French Cafe, Brioche Doree, Bruegger's Bagels, Timothy's Coffee and Michel's Baguette.

Bob Evans currently retains a Zacks Rank #3 (Hold). However, we believe, shares of Bob Evans should get a boost from this deal as it eliminated its major operational hindrance. The divesture will help Bob Evan to concentrate on its better-performing namesake brands -- Bob Evans Restaurant and Bob Evans Foods segments -- as well as meet its long-term goal to grow earnings per share 8% to 12% annually. The company will also receive a cash tax benefit of $53 to $63 million to be realized over the next few years.

Merger & Acquisition: An Industry Trend

Bobe Evans is not the only fast food chain looking to vend slower growth brands. In recent past, sell-offs and acquisitions gained momentum in restaurant industry as these are a long-term strategy to strengthen financial flexibility. To name a few, Yum! Brands Inc. (YUM - Analyst Report) divested its sluggish Long John Silver’s and A&W brands to concentrate more on its star performers like KFC, Pizza Hut and Taco Bell.

Wendy’s Co. (WEN - Analyst Report) dropped Arby’s from its name so that it can concentrate on its better performing Wendy's hamburger chain. Yet another company, Frisch's Restaurants Inc. (FRS - Snapshot Report) also sold all its Golden Corral operations last year.