Activist investor Starboard Value L.P. has increased its share holdings in Darden Restaurants Inc. and continues to press for leadership changes in the wake of the company’s planned Red Lobster sale.
Starboard, which said it has increased its holdings from 6 percent to 7.1 percent in the Orlando, Fla.-based casual-dining company, said this week in a letter to Darden’s board that the company needs “new direction and new leadership.”
Jeffrey Smith, managing director of New York-based Starboard, said Darden’s pending $2.1 billion sale of its 706-unit Red Lobster chain to private equity firm Golden Gate Capital, which is to be completed by month’s end, led to a $1 billion loss in market value for the company.
“Darden was founded based on the concept of offering quality food at an affordable price,” Smith said in his letter, continuing, “Unfortunately, it appears that these core values have been sacrificed in recent years and replaced with a corporate bureaucracy that has demonstrated extremely poor leadership, egregious entrenchment, excessive corporate spending and a complete lack of focus on serving the most important Darden constituency — the customers who visit Darden restaurants every day.”
Starboard recommended in May that shareholders approve its full slate of 12 board members at Darden’s annual meeting on Sept. 30.
Meanwhile, Darden has been working on new design and technology initiatives at Olive Garden, this month providing details about its revamp and plans to roll it out to 75 locations this year.
“Olive Garden provides a strong foundation for the overall Darden business,” said Eugene I. Lee, Jr., Darden’s president and chief operating officer, in a June earnings call with analysts. “It’s a premier brand in casual dining, with average restaurant volumes of $4.4 million and industry-leading returns.”
Starboard, which has pressed for changes along with fellow New York-based activist investor Barington Capital Group L.P., remained unswayed. Barington has proposed shareholders pass a resolution to name an independent board chairman, a position now held by Darden chief executive Clarence Otis, Jr.
“Something is horribly wrong at Darden,” Starboard’s Smith said in his letter, adding, “There isn’t any one silver bullet that can now easily transform Darden.”
In the two months since Darden announced the sale of Red Lobster, Smith said, the company’s stock price has declined 11 percent and underperformed peers by 16 percent.
“This relative performance represents a destruction of over $1 billion in total shareholder value, and we believe should be the last straw in a string of awful decision-making under the leadership of the current management team and board,” Smith said.
“After suffering for many years under failed leadership, it is going to take much more than a new Olive Garden logo or minor adjustments to its compensation program to right the ship,” Smith said. “Rather, we believe Darden needs to employ a collection of disciplined operational improvements and strategic actions from top to bottom in line with [founder] Bill Darden’s core values. With the right leadership in place, we can once again see an incredibly bright future for the Darden franchise.”