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Activist shareholders have made public demands of several other public restaurant companies this year.

Last month, for example, Bob Evans Farms Inc. fended off a call from Sandell Asset Management, which has a more than 5-percent stake in the Columbus, Ohio-based company, to split its restaurant and packaged-foods businesses and perform a giant sale-leaseback transaction of its owned real estate.

In August, the board of directors at Cracker Barrel Old Country Store Inc. rebuffed shareholder Sardar Biglari’s nomination to the board for the third time in three years. Among other proposals, Biglari had called for Cracker Barrel to slow the pace of its new-unit openings and for the removal of several directors from the board.

In light of the news that Barington had taken an activist stakeholder position with Darden this week, securities analyst Sara Senatore with Bernstein Research republished a research note from earlier this year that explored how Darden might unlock shareholder value in the absence of a sales turnaround at Red Lobster and Olive Garden.

Her note found that a “sum-of-the-parts” analysis commonly used by investors looking to break up an underperforming company likely would not find Darden to be significantly undervalued.

“We believe investors assessing Darden may also be considering nonfundamental drivers [of value creation],” Senatore wrote in April, “such as a potential spinoff of either the high-growth Specialty Restaurant Group at a presumably premium multiple, or the low-growth ‘cash cow’ of Red Lobster to a financial acquirer. A sum-of-the-parts analysis using comparable publicly traded companies does not suggest Darden’s assets are substantially underappreciated.”

Darden’s real estate holdings could be worth as much as $30 per share if they were part of a sale-leaseback transaction, she noted, but Darden likely would not pursue such a deal because operating cash flow would decrease significantly if the company had to pay much higher rent to a new landlord.

John Gordon, principal of San Diego-based Pacific Management Consulting Group, speculated that Darden would fight calls to divest the Specialty Restaurant Group because of what Darden officials call “internal synergies,” which the company would be unwilling to give up.

Darden wants to keep the high-growth potential of Capital Grille and its other assets in the specialty group, Gordon said, and it needs the significant cash flow from Olive Garden and Red Lobster to fund it.

“When you ramp up development of a Capital Grille or a Seasons 52 or LongHorn, the first year is expensive and a little slow,” he said. “Darden has said that the Specialty Restaurant Group concepts can stand on their own, but is that always true? I suspect that’s what they’re talking about when they talk about internal synergies.”

He added that Darden — as well as Bob Evans, for that matter — likely would have no interest in exploring a sale-leaseback transaction for its real estate.

“The reason why the investors want to do it is because they just want to make some money in the next year, but the restaurant brands are there forever,” Gordon said. “It’s the tale of the U.S. economy: short-term gratification versus longer-term thinking. But once you hold your real estate, your P&L looks better and you can own your destiny more, rather than some landlord owning it.”

Darden operates 704 Red Lobster units, 832 Olive Garden restaurants, 438 LongHorn Steakhouse units and 175 locations in the Specialty Restaurant Group.

Contact Mark Brandau at mark.brandau@penton.com.
Follow him on Twitter: @Mark_from_NRN