Darden Restaurants Inc.’s plan to sell its 706-unit Red Lobster division to San Francisco-based private equity firm Golden Gate Capital for $2.1 billion drew swift criticism from activist investors.
Orlando, Fla.-based Darden made the announcement early Friday morning, and by midday, activist investor Starboard Value L.P., which, along with Barington Capital L.P., had pressed for steps beyond the Red Lobster spinoff, said it had serious questions about the deal. Restaurant analysts were generally favorable toward the proposed sale.
Starboard, which owns about 5.5 percent of Darden’s shares, had petitioned for a special meeting for shareholders to consider the Red Lobster spinoff.
Jeffrey Smith, Starboard’s chief executive and chief investment officer, said in a statement, “We seriously question the decision to rush such a transaction rather than wait to hear the views and perspectives of shareholders on this critically important topic.
“Our suspicions all along have now unfortunately been confirmed — this sale is the wrong transaction, at the wrong time, for the wrong reasons,” Smith said. “This board’s value-destructive and self-serving actions fly in the face of corporate democracy.”
In its Red Lobster sale announcement, Darden said, "the closing of this transaction is not contingent on the results of a special meeting.”
Smith said the proposed $2.1 billion Red Lobster sale “woefully undervalues” the brand and its real estate.
“It is truly unbelievable that the current board has the audacity to negotiate a transaction that does not require shareholder approval when a significant majority of Darden’s shareholders have formally demanded a special meeting on this very topic,” Smith said.
“If the company was intending to ignore the will of the shareholders and rush to do a transaction, you would have at least thought that it would have been a highly opportunistic transaction at a substantial premium to the underlying value of Red Lobster,” Smith said. “However, that is clearly not the case and it appears that Darden has instead sold Red Lobster in a rushed transaction at a severe discount.”
The proposed Golden Gate transaction was approved by Darden’s board of directors and is expected to close in the company’s first fiscal quarter of 2015, which runs from June to August.
Analysts had varied reactions to the Red Lobster announcement. Mark Kalinowski, analyst with Janney Capital Markets, referenced the activist investor snub and headlined his early note: “DRI: Who Knew Lobsters Had Middle Fingers?”
“One positive is that Darden rids itself of its most troubled business,” Kalinowski wrote, “and the sale price is about what the Street was expecting. However, after a sale of Red Lobster, ‘New Darden’ would still consist of seven (read: too many) restaurant brands.”
Kalinowski noted that Darden is required by law to call a special investor meeting and plans to do so. “…Clearly today's announcement is a thumb in the eye of activist investors,” he added.
What analysts are saying
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Here’s a look at other restaurant analyst notes on the deal:
Stephen Anderson, Miller Tabak + Co.
“Golden Gate Capital is no stranger to restaurant investments; in the past five years, the fund has purchased California Pizza Kitchen and two former brands owned by Brinker International: Romano’s Macaroni Grill (now owned by Ignite Restaurant Group) and On The Border.”
He added that his team had modeled a $2.3 billion price for Red Lobster, including $845 million in implied real estate value. The resulting $2.1 billion price is about nine times the earning before interest, taxes, depreciation and amortization valuation for the trailing 12 months through February, he said.
The deal, Anderson added, gives Darden an opportunity to “(1) strengthen its balance sheet; and (2) turn operational focus toward turning around operations at the flagship Olive Garden concept.”
Lynne Collier, Sterne Agee
“We believe that the sale of Red Lobster is a long-term positive for DRI as it reduces the volatility of the company's financial performance and will provide for reduction in debt,” Collier said. “…The divesting of Red Lobster is a step in the right direction in improving DRI's long-term financial performance and improves the outlook for dividend.”
David Palmer, RBC Capital Markets
“The net impact of this transaction is that Darden will be a high dividend yielding company without the volatility and ongoing earnings drag from Red Lobster,” Palmer said.
He estimated that Olive Garden will represent about 60 percent of Darden’s revenue after the sale. Palmer added that investors would like to see more evidence that Olive Garden can drive same-store sales growth in the low single digits.
Sara H. Senatore, Bernstein Research
General and administrative costs for Darden should be reduced, Senatore noted. “DRI is now targeting more significant G&A cost savings, which will be critical in our view,” she wrote.
David Tarantino, Robert W. Baird & Co.
While Tarantino’s team was encouraged that Darden’s proposed Red Lobster deal is at a “reasonable multiple,” he added that, “we still believe the path to creating long-term shareholder value lies within DRI's ability to drive better core operating performance for remaining brands.”
Jeffrey A. Bernstein, Barclays Capital
Darden was “prudent” in its plan to use net proceeds from the Red Lobster sale to retire debt and repurchase stock, Bernstein said.
“Absent recent activist involvement, we believe investors would have appreciated the strategic merit of such a transaction; monetizing the most volatile brand, while allowing for renewed focus on resurrecting the Olive Garden brand,” Bernstein said.
After taxes and transaction costs, Darden said Friday it expects to receive net proceeds of $1.6 billion, of which about $1 billion would be used to retire outstanding debt. The remaining $500 million to $600 million would be deployed for a share repurchase program of up to $700 million in fiscal 2015, the company said.
In addition to Red Lobster and Olive Garden, Darden also owns and operates LongHorn Steakhouse and brands within its Specialty Restaurant Group, including Yard House, Bahama Breeze, Seasons 52, The Capital Grille and Eddie V’s.
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