UPDATE 3-Activist investor turns up heat on Darden CEO

Tue Jan 21, 2014 2:54pm EST

By Lisa Baertlein

Jan 21 (Reuters) - Starboard Value has urged Darden Restaurants Inc to delay plans to spin off of its struggling Red Lobster chain, becoming the second activist investor in as many weeks to call on the company to rethink its strategy for improving results.

The calls for change from two investors holding a total of almost 8 percent of Darden shares have put intense pressure on Chairman and Chief Executive Clarence Otis.

Otis has been CEO of the Olive Garden parent since November 2004 and chairman of Darden's board of directors since November 2005. He orchestrated the acquisitions of LongHorn Steakhouse, Capital Grille, Eddie V's and Yard House. Critics say these moves led to a lack of focus, bloated operating costs and roughly 18 months of market share losses at its three biggest brands.

"The proposed Red Lobster separation is not just a sub-optimal outcome, but one that may prove to be value destructive - potentially even worse for shareholders than the status quo," Starboard Value Managing Member Jeffrey Smith wrote in a letter to Darden's CEO and directors on Tuesday.

"The clock is ticking," said Hedgeye Risk Management restaurant analyst Howard Penney, who previously called for Otis' ouster.

Darden's proposal to spin off or sell Red Lobster followed a call by Barington Capital Group to split the company in two. One company would operate the mature Olive Garden and Red Lobster chains. The other would expand brands such as LongHorn Steakhouse, Seasons 52, Capital Grille and three others.

Barington also pushed Darden, the largest U.S. full-service restaurant operator, to explore creating a publicly traded real estate investment trust (REIT) to "unlock the value" of its property holdings, which it valued at around $4 billion before leakage costs.

The hedge fund has dubbed Darden's Red Lobster plan "incomplete and inadequate."

In his letter to Darden on Tuesday, Smith called Darden's Red Lobster proposal, "a hurried, reactive attempt, in the face of shareholder pressure to do the bare minimum to appease shareholders."

Smith called on Darden to consider other options to boost share value, including slashing operating costs, improving restaurant results and divesting real estate.

Starboard, which said it owns 5.5 percent of Darden's shares, noted that Darden's best-performing competitors own comparatively little real estate.

Darden on Tuesday stood its ground, saying it did a comprehensive evaluation of its alternatives to bolster company results, including those suggested by Starboard and others. The Orlando-based company said that review included input from financial and legal advisors as well as investors.

"We believe the comprehensive plan we announced in December is in the best interest of all Darden shareholders, and we are moving forward with that plan," the company said in a statement.

Just months before unveiling Darden's plan to spin-off or sell Red Lobster, Otis announced the retirement of Chief Operating Officer Drew Madsen, a long-time executive. Madsen's successor was Gene Lee, president of Darden's Specialty Restaurant Group that includes faster-growing chains such as Capital Grill and Yard House.

"Did he buy himself some time, and if so, how long?" asked Bernstein Research Restaurant analyst Sara Senatore.

Darden shares, which peaked at around $56 in September 2012, slipped 0.2 percent at $50.90 in afternoon trading on the New York Stock Exchange.