Activist Investor Opens Second Front Against Darden Restaurants

Battle for control of restaurant operator gets more caustic.

Mar 27, 2014 at 11:35AM

More than just halting the separation of its Red Lobster chain and its real estate with the company, beyond divvying the company into separate entities, and going further than just splitting the roles of chairman and CEO, hedge fund Barington Capital says it's time for Darden Restaurants (NYSE:DRI) to oust its current top executive for someone with more experience in the dining industry.


Darden Restaurants' Chairman and CEO Clarence Otis. Source: Darden Restaurants.

In a letter to Darden's independent directors, the activist shareholder said it no longer has confidence in Chairman and CEO Clarence Otis to operate the company effectively. The letter charges that, having presided over a period of value destruction, Otis has allowed a corporate culture that has earned "horrific" ratings from Institutional Shareholder Services for its governance practices.

Last December, Darden announced a program to turn around its declining value and performance via measures including spinning off its Red Lobster chain. The plan to cut out the seafood restaurants was offered partly to appease the hedge fund, which had called for spinning off the Olive Garden chain as well. Nonetheless, Barington and fellow hedge fund operator Starboard Capital teamed up to argue the plan does not go far enough. Starboard now wants a special shareholder meeting to allow investors to voice their opinion on the proposal.

Barington's latest letter seeks to turn up the heat on management to more fully consider other alternatives. The restaurant operator recently doubled down on its commitment to go forward with only the Red Lobster separation. The back and forth is reminiscent of other clashes seen in recent months between activist shareholders and entrenched boards that prefer their own ideas, but ones that thus far have led to long periods of underperformance.

Billionaire investor Nelson Peltz has notably pushed for PepsiCo to become a snack food company by spinning off its drinks business. Engaged Capital publicly declared that it had lost confidence in the CEO of Abercrombie & Fitch to lead the teen retailer in its next stage of growth, Daniel Loeb of Third Point is taking on Sotheby's over its poison pill program, and Sandell Asset Management has clashed with Bob Evans Farms over separating the company's restaurant chain from its vertically integrated packaged foods division. Dow Chemical, Cracker Barrel, and even J.C. Penney last summer ran into vitriolic confrontations with well-heeled investors who sought to impose their own vision on the companies.

In Darden's case, it's not that management disagrees with the hedge funds that change is necessary; the dispute lies in the extent to which it needs to be carried out. Darden said it investigated Starboard's proposal to spin off Olive Garden with Red Lobster, but views the pasta palace as a potential growth concept. The idea of a real estate investment trust, as the hedge fund suggested, was also considered and rejected as a suboptimal solution. Darden agrees that its smaller concept chains -- Capital Grille, Yard House, Bahama Breeze, etc. -- are where high-growth sales lie, but keeping the company otherwise whole without Red Lobster is preferred.

Barington generally stands with Starboard in calling for change at Darden Restaurants. But by effectively saying a fish rots from the head down, it showed a willingness to open a second front in this battle for control of the restaurant operator.

Your turn to be an analyst
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Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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