Darden’s plan misses mark, says shareholder group

by Monica Watrous
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NEW YORK — Darden Restaurants’ plan to spin-off Red Lobster and suspend unit growth for Olive Garden failed to satisfy a group of shareholders urging for a different split.

Barington Capital Group, L.P., which owns more than 2% of the outstanding common stock of Orlando, Fla.-based Darden Restaurants, Inc., recommended in a Sept. 23 letter the casual-dining operator create two independently managed, publicly-traded restaurant operating companies that would separate Olive Garden and Red Lobster from Darden’s higher-growth brands of LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V’s Prime Seafood. Additionally, the letter called for a transfer of the company’s real estate assets, valued at approximately $4.2 billion, into stand-alone, publicly-traded real estate investment trusts.

On Dec. 19, Darden announced a comprehensive strategic review that included a tax-free spin-off or sale of Red Lobster, reducing unit growth at Olive Garden and LongHorn Steakhouse, lowering capital expenditures and forgoing acquisitions of additional brands, aggressive operating support cost management and enhanced cost efficiencies.

For Barington, however, Darden’s plan missed the mark.

“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 a Jan. 13 statement. “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.”

Costs associated with unlocking the value of the real estate assets, Barington said, would be “vastly” exceeded by the value created for shareholders. Failing to pursue the opportunity may hinder Darden’s ability to monetize its real estate in the future, Barington added.

Additionally, Barington said Darden’s decision to separate Red Lobster may not be enough to improve the management and operating execution of the remaining brands.

“We are encouraged that the company has acknowledged that a separation of Darden into two independent companies ‘will better enable the management teams of each company to focus their exclusive attention on their distinct value creation opportunities,’” Barington noted. “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 reiterated its recommendation to separate Olive Garden from Darden’s higher-growth brands.

“Given the extensive list of benefits that Darden has stated will be achieved from the separation of Red Lobster, we think that it is only logical that Darden should do the same with respect to its largest brand that accounts for over 40% of the company’s revenue,” Barington said. “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.  We are convinced that Darden can and should be doing more to improve value for its shareholders.”
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