By Lisa Baertlein
Jan 21 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
"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
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
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
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.