Red Lobster Cast Overboard for 2.1 Billion Clams. Are Investors Better Off?

Darden Restaurants plans to use the proceeds to pay down debt, keep its dividend, and buy back stock.

May 16, 2014 at 4:03PM

G
Source:  Darden Restaurants

Red Lobster has brought out the seafood lover in San Francisco-based private equity investment firm Golden Gate Capital. The firm, which controls over $12 billion in capital and has a history of acquiring or investing in big consumer names, is purchasing the Red Lobster chain from parent Darden Restaurants (NYSE:DRI). You might recall three years ago when Golden Gate acquired California Pizza Kitchen. Golden Gate has big plans in store for Red Lobster, but Darden Restaurants has even bigger plans for the cash. Is this a good move or a sign of a managerial problem?

G

Source: Darden Restaurants

Trading Red Lobster for some green
The deal that was announced on Friday is for $2.1 billion in cash in exchange for its Red Lobster business and "certain other related assets and assumed liabilities." After all the lawyers and middlemen get their share, Darden Restaurants expects to net $1.6 billion. $1 billion of this is earmarked for a much-needed debt pay down. As of February of this year, Darden Restaurants had liabilities to the tune of $5.1 billion.

Darden Restaurants anticipates that the debt pay down will strengthen its credit metrics and allow it to continue to pay its quarterly dividend of $0.55 per share. This dividend currently costs the company nearly $300 million a year in cash. Finally, Darden Restaurants plans to execute new stock buybacks up to $700 million. Based on the current market cap, this should retire enough shares to boost earnings per share by around 10% while also reducing the cash needs for the dividend by 10%.

Logo
Source:  Darden Restaurants

Maximizing shareholder value
Darden Restaurants reminds everybody that in the last five years alone, it has returned over $2 billion to shareholders in the form of dividends and share buybacks. It wants you to know, based on that history, that it has a shareholder-first mentality. With that in mind, Golden Gate Capital was selected from a "broad universe of potential financial and strategic buyers." According to Darden Restaurants, the company considered a myriad of value-creating options, and it decided this one was simply the best for shareholders.

Rl

Source: Darden Restaurants

Clarence Otis, Chairman and CEO of Darden Restaurants, stated, "Our Board and management team are highly focused on enhancing shareholder value, and we believe this transaction is consistent with the efforts under way to deliver on this responsibility." Darden Restaurants also owns the Olive Garden and Longhorn Steakhouse chains. The sale of Red Lobster will allow Darden Restaurants to focus its attention on these two strong brands. Last quarter, for instance, Red Lobster saw a revenue decline of 8.7% while Olive Garden saw a decline of only 3.4% and Longhorn Steakhouse sales soared by 9.1%. Traffic at Red Lobster declined by double-digit percentages each month of the quarter.

Rl

Source: Darden Restaurants

Foolish final thoughts
Back in March during Darden's earnings conference call, COO Eugene Lee stated, "We thought that [a Red Lobster] promotion that we ran in December was going to be more effective than what it was. It tested very well and we were focusing on superior sea food. It really resonated with the consumers in test and then when we put it in market it did not perform at the level we thought it was going to perform at."

It sounds like the problem with Red Lobster, at least in part, is something wrong with their testing and being able to figure out how to make the customer happy in the real world. Is Red Lobster really that much of a distraction or was it a merely a symptom of another larger underlying problem in the organization that happened to hit Red Lobster harder? We will know the answer if Darden is truly successful at engineering a turnaround at Olive Garden.

Was red lobster sold too cheaply knowing how transaction expenses are gaining efficiency?
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Nickey Friedman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers