Activist investor Barington Capital Group LP said Monday that Darden Restaurants Inc.’s December-announced plan to spin off Red Lobster falls short, especially in taking advantage of the company’s owned real estate.

New York-based Barington, which represents a group of shareholders that owns more than 2 percent of Darden’s outstanding shares, said in a statement that it was “disappointed” with Darden’s plan, which also includes halting Olive Garden development and slowing LongHorn Steakhouse expansion.

“While we appreciate that Darden will be suspending new unit growth at Olive Garden and further reducing expenses as we recommended, we view the overall plan as incomplete and inadequate,” Barington said. “In particular, we are disappointed that Darden's plan fails to take advantage of opportunities to realize substantial value from Darden's extensive real estate holdings.”

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A second activist investor, New York-based Starboard Value LP, took a 5.6-percent stake in Darden in December and pressed for changes as well, including opportunities in the company’s real estate holdings.

Barington said in December that it estimated Orlando, Fla.-based Darden's real estate assets at about $4 billion and called for spinning that off as a separate real estate investment trust.

“The costs associated with unlocking the value of these assets would be vastly exceeded by the value created for shareholders,” said Barington, which plans a Jan. 30 online presentation to discuss its concerns further.

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

On Monday, Rich Jeffers, Darden’s director of communications, said the board of the nation’s largest casual-dining company remained focused on creating value for shareholders.

“We are confident that our plan, together with actions we are taking to enhance guest experiences and reinvigorate demand, will lead to improved performance in our restaurants and substantially increase value for all Darden shareholders,” Jeffers said.
Barington has been pushing since September for a breakup of Darden, which also owns the LongHorn Steakhouse, Bahama Breeze, Capital Grille, Eddie V’s, Seasons 52 and Yard House restaurants.

In its statement Monday, Barington said Darden’s current Red Lobster spin-off plan “could hinder the company's ability to monetize its real estate in the future, a prospect that should give all shareholders great pause.”  

While details of Darden’s Red Lobster plan have not been finalized, Barington said, “we would strongly object to any transaction that limits the ability to realize the significant value of the company's real estate assets for the benefit of all Darden shareholders.”

Evaluating real estate

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In a “Dismantling Darden” report released Oct. 11, advisory firm Hedgeye Risk Management’s estimated Darden’s real estate value at a “conservative” $3.6 billion, compared to Barington’s $4 billion estimate.

Hedgeye’s restaurant team said, “This works out to $3.438 million per owned restaurant, which is significantly below the company’s stated cost to build a new Red Lobster or Olive Garden restaurant.”

Hedgeye cited Darden’s May 2013 Securities and Exchange Commission filings that put the cost in fiscal 2013 of a new Red Lobster restaurant at about $4.2 million and a new Olive Garden restaurant at about $4.1 million. As of May 26, Hedgeye said 1,048 of Darden’s restaurants were on owned sites and 1,090 were on leased sites.

In a Dec. 19 call with analysts, Clarence Otis, Darden’s executive chairman and chief executive, the company had evaluated a potential real estate investment trust (REIT).

“As we went through that evaluation,” Otis said, “we believe that the value creation opportunity is limited. And we believe that, that's the case because the Darden REIT may trade at a lower multiple than others so the net lease REIT and the substantial debt breakage cost that are involved. And so that is not something that we think makes sense going forward.”

Otis added that the company’s analysis saw “no diversification, really, in a Darden REIT, and the debt breakage costs are hundreds of millions of dollars.”

Brad Richmond, Darden’s chief financial officer and senior vice president, added that of the current 705 Red Lobster units, 473 are on owned real estate. That owned land would move to the spun-off Red Lobster company, he said.

Barington said it was “encouraged that the company has acknowledged that a separation of Darden into two independent companies,” but “unfortunately, following the separation of Red Lobster, Darden will still be left managing seven disparate brands with an infrastructure that we believe is too complex and burdened to compete with its more focused and nimble competitors.”

Barington also said it still recommends separating Olive Garden from Darden’s other higher-growth brands.

“Given the extensive list of benefits that Darden has stated will be achieved from the separation of Red Lobster,” Barington said, “we think that it is only logical that Darden should do the same with respect to its largest brand that accounts for over 40 percent of the company's revenue.”

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 released its Red Lobster spin-off plan when it released those earnings.

“Unfortunately, Darden's proposed plan appears to us to be more of an attempt to do the minimum necessary to maintain the status quo than an effort to formulate a truly comprehensive strategy to improve long-term shareholder value,” Barington said.

Barington said it would release further details about its Jan. 30 presentation later this month.

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