Activist investor Starboard Value LP urged Darden Restaurants Inc. on Tuesday to delay the spinoff or sale of its Red Lobster chain and to consider broader changes at the casual-dining company than those announced last month.

New York-based Starboard, which represents about 5.5 percent of Darden’s shares, said in a letter to chairman and chief executive Clarence Otis that it would like the Orlando, Fla.-based company to look more closely at improving operations, cost-cutting and the possibility of moving its owned real estate into an investment trust.

“While we are pleased that you recognize that Red Lobster could perform better with increased management focus,” Starboard managing member Jeffrey C. Smith wrote, “we do not believe the currently proposed plan to spin off or sell Red Lobster, by itself, is in the best interest of shareholders.”

Starboard’s letter to Darden came a week after a second activist investor, New York-based Barington Capital Group LP, said the Red Lobster spinoff fell short, especially in taking “advantage of opportunities to realize substantial value from Darden's extensive real estate holdings.”

Darden has stood by its Dec. 19 plan, which included a number of executive changes along with the announcement of a sale or spinoff of Red Lobster.

In a statement released Tuesday afternoon, the company said, “While we appreciate the views of our shareholders, we have completed a comprehensive evaluation of alternatives available to enhance shareholder value, including those suggested by Starboard and others.”

The company said it is confident in its original plan for Red Lobster, which included the spinoff as well as “reducing new unit growth, suspending acquisitions, increasing operating support cost savings, increasing return of capital to shareholders and refining our compensation and incentive programs.”

Smith said Starboard had spoken with Darden executives on Jan. 8 and planned to meet with them later in the month in Orlando. But “given the critical and time-sensitive nature of the company’s recently announced plan to separate Red Lobster, we feel it is important to comment publicly at this time,” Smith wrote.

He said Darden’s current market price understates the value of Darden’s real estate and business assets. “We believe this is due primarily to the company’s extended record of disappointing operating performance, poor capital allocation and missed expectations,” Smith noted.

For the Nov. 24-ended second quarter, Darden reported a 41.1-percent decline in profit, to $19.6 million, or 15 cents per share, from $33.6 million, or 26 cents per share, in the prior-year period. Revenue rose 4.6 percent, to $2.05 billion, from $1.96 billion in the same period last year.
Darden announced its Red Lobster spinoff plan when it released those earnings.

Smith said Starboard was concerned about the Red Lobster spinoff because it would create “a new public company with a single poorly performing restaurant concept that we would expect to trade at a steep discount to Darden and other peers.”

In addition, Smith said, the Darden plan did not address “full value for its substantial real estate holdings” and other key factors, which he said included “a bloated cost structure, a lack of focus on restaurant operations and an inefficient asset base and capital structure.”

He said the proposed Darden plan seemed to be “a hurried, reactive attempt, in the face of shareholder pressure, to do the bare minimum to appease shareholders and distract from the company’s underlying problems, rather than the result of an informed and comprehensive review of all available opportunities to create shareholder value.”

Starboard also criticized Darden for not addressing improvements at Olive Garden “Although Olive Garden’s same-store sales have not been as weak as Red Lobster’s in recent quarters, Olive Garden is a key driver of Darden’s value and is also in need of substantial operational improvements,” he said.

In the most recent quarter, Olive Garden’s U.S. same-store sales declined 0.6 percent and Red Lobster’s fell 4.5 percent.

Darden Restaurants owns and operates more than 2,100 restaurants with more than $8.5 billion in annual sales. In addition to its three largest brands, Red Lobster, Olive Garden and LongHorn Steakhouse, the company also owns Bahama Breeze, The Capital Grille, Eddie V's Seasons 52 and Yard House brands.

Update: Jan. 21, 2014  This story has been updated to include comments from a statement issued by Darden.

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