Darden's Activists Are Right, but Will Management Listen?

Darden Restaurants (NYSE: DRI  ) has fast-growing chains that, if not for their underperforming brethren, would be among the brightest spots in the corporate restaurant industry. But no one has been able to focus on anything but the struggling lower-market brands -- Olive Garden and Red Lobster. At the tail end of 2013, management announced that it would spin off the latter property, delighting some shareholders while leaving others still unsatisfied. Now, activist pressure is mounting for Darden to continue taking substantial action in order to help realize the underlying value of its profitable enterprises.

Activate!
Last year saw the rise of activism in the investment world, and the last thing executives wanted to read in the papers was that a big-name investor had taken a stake in their companies.

For Darden, analysts and shareholders alike had been calling for action as the company repeatedly showed both Red Lobster and Olive Garden lagging the rest of the company in store-level sales figures. The concepts, compared to other Darden chains like The Capital Grille and LongHorn Steakhouse, are dated and finding it difficult to attract new customers.

Out of Darden's more than 2,000 restaurants, it will divest nearly 700 Red Lobsters in a spinoff to be completed in the first quarter of next year. For some, not only is this too small of an effort, but it isn't even structured to work in favor of shareholders.

Hedge fund Barington Capital Group, which holds roughly 2% of Darden's shares, has called management's plan "inadequate" and "incomplete." Barington believes the company's real estate is worth as much as $4 billion, and if some were to be sold or spun off along with Red Lobster, shareholders could begin to realize that value. Another firm, Starboard Value, holds a 5.6% position in the company and was similarly disappointed with Darden management's proposed actions. 

Furthermore, Barington believes that Olive Garden should join Red Lobster's voyage outside the wing of Darden. As is, the company will still be managing its largest property and most mature restaurant, whereas the investor believes management should focus intently on the high-growth brands. This is not an uncommon thesis among shareholders and analysts.

More to come?
Barington's position is not substantial enough to make a huge statement, a la Daniel Loeb or Bill Ackman, but the hedge fund makes valid points that other shareholders may align with. Moreover, Darden's image as a company doing just enough to keep the investors happy is blood in the water for the big-name activists to step in.

There is no denying that Darden holds tremendous value in both its real estate portfolio and its fast-growing brands. Barington's overarching thesis that these assets need to see the light of day is correct. How and when it will happen, though, is yet to be determined.

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  • Report this Comment On January 19, 2014, at 8:39 AM, Howdie wrote:

    All big chain restaurants suck. When's the last time you ate at a Howard Johnson? People get bored with them when there are too many and they have to fail; it's only a matter of time. And when an entity get big, management sees only number. They mess them up when they get big by trying to compete only on price. Then the quality goes out the window and the place becomes as soulless as an early industrial era textile mill.

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