Activist shareholders continue to oppose the proposed sale of Red Lobster by Darden Restaurants Inc., calling the deal “grossly misleading” in its valuation.

Orlando, Fla.-based Darden said last week that it had agreed to sell its Red Lobster chain to private-equity firm Golden Gate Capital for $2.1 billion in cash. Darden expects to net about $1.6 billion after taxes and transaction costs, of which about $1 billion would go toward retiring debt. The remainder would go toward a new share repurchase program of up to $700 million in fiscal 2015.

Darden first announced plans to sell off the 706-unit chain in December to focus more on Olive Garden. The move has been vigorously opposed by two activist investor groups, in particular, which have called for a special meeting of shareholders to oppose the deal, though any vote against it would be nonbinding.

Darden officials reiterated Friday that the proposed sale is not contingent on the results of a shareholder vote.

On Monday, New York-based Barington Capital Group L.P., one of the activist investor groups opposing the deal, issued a statement calling Darden’s plans “unconscionable,” and arguing the “fire-sale price” destroys more value than it creates. James Mitarotonda, Barington’s chair and chief executive, called the announced valuation of the transaction “grossly misleading” because it includes the value of Red Lobster’s real estate.

The deal was valued at about nine times the chain’s trailing 12 months of earnings before interest, taxes, depreciation and amortization, or EBITDA. As part of the deal, however, American Realty Capital Properties will buy the restaurant real estate for $1.5 billion and lease the properties back, which means Golden Gate is paying only about $600 million for Red Lobster’s restaurant operations. That would amount to less than 5.5 times the chain’s pro forma EBITDA of about $115 million, considering the estimated $120 million Red Lobster would be paying in rent, Mitarotonda said.

In addition, the transaction would generate about $500 million in taxes and transaction costs that could be avoided, he argued.

“While the Red Lobster transaction confirms the significant value of the company’s real estate, it will unfortunately preclude the company from entering into a variety of value maximizing transactions with respect to these assets with potentially lower tax and transaction costs, such as the creation of an independent real estate investment trust, or REIT,” he continued.

Barington, along with investor group Starboard Value L.P., has long pushed for Darden to sell off the Red Lobster operations along with sister chain Olive Garden, but to hold on to the restaurant real estate, which would have allowed it to collect rent.

“This approach would have enabled the board to create significantly more value for shareholders with significantly less tax leakage, while preserving the flexibility to further enhance shareholder value through the creation of a REIT in the future,” Mitarotonda said in the statement.

“It is clear to us from the board’s decision to pursue this imprudent transaction and its horrific record in the area of corporate governance, that Darden’s independent directors are neither focused on, nor responsive to, shareholder concerns,” Mitarotonda said. “In over 14 years of investing, we have never seen a group of directors that have allowed a company to be run with such a blatant disregard for shareholder interests.”

Clarence Otis, Darden’s chair and chief executive, said in a statement Friday that the company has had extensive conversations with shareholders about the casual-dining group’s strategic direction. He said the Golden Gate deal, which is expected to close in the first quarter of 2015, is in the best interest of shareholders.

Darden said the company intends to convene the proposed special meeting of shareholders “as promptly as practicable.”

Company officials told the New York Times on Friday, however, that holding off on the sale agreement until after the proposed shareholder vote could have prompted Golden Gate to walk away — though officials with the private-equity firm declined to comment.

“It was clearly communicated during this process, by all bidders, that uncertainty was unacceptable,” Otis said.

Contact Lisa Jennings at lisa.jennings@penton.com.
Follow her on Twitter: @livetodineout