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Activist investor looks to overthrow Darden board

Activist investor looks to overthrow Darden board

Starboard Value proposes a plan to replace all 12 directors on the current board after dissatisfaction with the Red Lobster deal.

Activist investor Starboard Value L.P. put forth a plan on Thursday to replace all 12 directors on Darden Restaurant Inc.’s board with its own slate, which includes several restaurant industry veterans.

Starboard Value, which owns 6.2 percent of Darden’s shares, in a letter to other shareholders condemned Orlando, Fla.-based Darden's proposed $2.1 billion sale of Red Lobster to private equity firm Golden Gate Capital, which was announced May 16. Starboard also criticized Darden for not calling a special meeting that a majority of shareholders had requested.

“While it has been clear for some time that some level of change would be required at Darden to increase and protect value for shareholders,” Starboard said in the letter, “this self-serving and value-destructive Red Lobster sale flies in the face of corporate democracy and has made it absolutely clear that the majority of Darden’s current directors must be replaced at the annual meeting.”

Darden management, in a statement after Starboard’s letter was released, stood by its board and said it would consider Starboard’s nominations “in due course.” Darden usually holds its annual meeting in the fall, but no meeting is currently scheduled.

The casual-dining company, which also owns Olive Garden, LongHorn Steakhouse and other brands, said, “Starboard is seeking effective control of the company — representation which is disproportionate to Starboard's recently acquired approximate 6.2-percent stake in Darden.”

Starboard’s board efforts gained the support of fellow activist investor Barington Capital Group L.P., which owns about 2 percent of Darden’s shares. Barington has also been pressing for extensive changes beyond the sale of the 706-unit Red Lobster, including the possible spinoff of the 836-unit Olive Garden, as well as the creation of a real estate investment trust (REIT).

“Shareholders can no longer afford to be represented by directors that appear neither focused on, nor responsive to, shareholder concerns,” said James A. Mitarotonda, Barington’s chairman and chief executive, in a statement. “Darden desperately needs directors that will represent the interests of the owners of the company and not just the CEO and themselves.”

Mitarotonda noted that two-thirds of Darden’s directors are in at least their ninth year of service, including the chairs of all five of the board’s standing committees. Darden, however, said four of its independent directors had joined the board in the last five years, and two new directors had been added in the last two years.

Among Starboard’s slate of 12 nominees are several restaurant industry veterans, including: Jean M. Birch, former president of IHOP; Bradley D. Blum, former president of Olive Garden; Lionel L. Nowell III, former senior executive at Pizza Hut and CFO of Pepsi Bottling Group; Charles “Chuck” M. Sonsteby, former CFO of Brinker International Inc.; and Alan N. Stillman, former chairman of Smith & Wollensky and founder of TGI Fridays.

Starboard noted that Blum, as well as the investor’s advisor, Bob Mock, led Olive Garden and transformed it from “a struggling chain with highly negative same-store-sales into a highly profitable, industry-leading concept that experienced 29 consecutive quarters of same-store-sales increases under their watch, and grew AUV from approximately $2.5 million to $4 million.” The company also noted that Sonsteby had been at Brinker when it faced sales and profitability challenges similar to what Darden faces today.

Analysts weigh in

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One industry expert endorsed Blum and Sonsteby. Stephen Anderson, a restaurant analyst with Miller Tabak + Co. LLC, said in a note: “We would not be surprised if Brad Blum and Chuck Sonsteby … were tapped as a potential part of a new management team, with Mr. Blum possibly even replacing current [Darden] CEO Clarence Otis.”

The escalating battle between the activist investors and Darden raised concerns with another analyst.

David Tarantino, an analyst with Robert W. Baird & Co., said in a note that he was not surprised by Starboard putting forward its own slate of directors, but “we see risk that the threat of board/management changes could cause distraction [and] disruption that could impede progress on improving core operating fundamentals, which we believe is the primary way for DRI to create shareholder value.”

The value of the $2.1 billion deal for Golden Gate to buy Red Lobster is what drew Starboard’s critique. Starboard noted that Golden Gate signed a deal to sell Red Lobster’s real estate with American Realty Capital Properties Inc. for $1.5 billion, “so their actual purchase price for the Red Lobster operating business is just $600 million.”

Starboard also noted that “more concerning for Darden shareholders” was that the deal was structured in a tax-inefficient manner.

“The net proceeds to Darden of $1.6 billion, less the $1.5 billion of real estate value that we believe could have been realized by Darden tax-free, means that the value received for Red Lobster’s operating business was a paltry $100 million,” Starboard said, adding that was less than one times earnings before interest, taxes, depreciation and amortization, or EBITDA.
 
“While Darden has claimed that the transaction multiple for the Red Lobster Sale is nine times EBITDA,” Starboard said, “this is a gross distortion of the facts.” Starboard added that Darden’s statements have been “only a thinly veiled attempt to confuse shareholders regarding the true economics of the transaction.”

Darden countered by saying Starboard's claims were assertions “based on incorrect and unrealistic analysis, which results in misleading conclusions regarding the value associated with the sale of the Red Lobster business.”

In total, Darden operates more than 2,100 casual-dining restaurants, including Olive Garden, LongHorn Steakhouse, The Capital Grille, Yard House, Seasons 52, Bahama Breeze and Eddie V’s.

Contact Ron Ruggless at [email protected].
Follow him on Twitter: @RonRuggless

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