Will Red Lobster Make You More Than Just Seasick?

Despite seemingly good news that Darden Restaurants sold its Red Lobster chain for $2.1 billion, major investors are criticizing the company's transaction with Golden Gate and its relationship with American Realty Capital Properties as being inadequate.

May 22, 2014 at 3:00PM

Picture

Source: Red Lobster

After announcing on May 16, 2014 that it would be selling its Red Lobster restaurant chain to Golden Gate Capital, Darden Restaurants (NYSE:DRI) was punished by Mr. Market, who pushed the company's shares down 4%. This downturn saw a partial recovery on May 19 when the company's shares climbed 1%, but the fact of the matter is that Darden's troubles may just be getting started. In response to the asset sale, institutional investors like Starboard Value and Barington Capital Group have attacked management for misleading investors.

Darden's transaction is tricky!
According to corporate news releases, Darden is slated to sell its Red Lobster chain to Golden Gate Capital in a transaction valued at $2.1 billion. After factoring in taxes and transaction costs that Darden will have to cough up, the company should net around $1.6 billion from the deal.

While investors may think this is a decent price for a business hit with year-over-year sales declines, some of the company's top investors aren't so sure. In addition to Starboard calling for a shareholder vote on the issue, Barington announced its "strong opposition" to the deal for the following reasons:

Picture

Source: Barington Capital Group

One of the major points of contention disclosed by Barington is the role that American Realty Capital Properties (NYSE:VER) is expected to play. Following the completion of the transaction, American Realty will buy more than 500 (no specific number has been given) of Red Lobster's 705 real estate locations from Golden Gate for $1.5 billion that it will then lease back to the Golden Gate-owned chain. Of these locations, approximately 93.5% will be on 25-year initial term contracts, while the remaining 6.5% will have a weighted-average lease of 18.7 years.

While this kind of transaction may not make much sense at face value, there are a number of benefits that will accrue to both American Realty and Golden Gate as a result. In addition to reducing Golden Gate's purchase price of Red Lobster to $600 million on a pre-tax basis, the deal will leave American Realty holding the bag should Red Lobster ever go under. Yes, the agreement between it and Golden Gate will net American Realty an estimated 9.9% return annually, but if Red Lobster's turnaround fails, it will be American Realty  that is stuck with the empty buildings.

This may be shortchanging shareholders!
Assuming that Red Lobster can turn around, both Golden Gate and American Realty stand to make some money. However, investors like Barington and Starboard fear that Darden's management team is being reckless by selling the chain for so cheap and would prefer that the company divest itself of Red Lobster and Olive Garden through a spinoff.

Picture

Source: Red Lobster

In its defense, Darden claims that the deal values Red Lobster at about 9 times EBITDA (earnings before interest, taxes, depreciation, and amortization), which is higher than the 6.2 times the entire company is trading for using 2013's metrics. Even better, Darden said that it will use the proceeds from the sale to reduce its $2.5 billion in debt by $1 billion and conduct a $700 million share buyback in 2015 with the rest.

Both of these data points make the deal hard to argue against; but as Barington pointed out, the company's management team is misleading investors when it comes down to its valuation of the sale. After factoring in the effects of the sale-leaseback and the estimated $120 million in cash rent Red Lobster will pay to use its locations, the company's pro forma EBITDA comes down to about $115 million. Taking Barington's estimates at face value, investors would see that Golden Gate is paying just 5.2 times Red Lobster's EBITDA, well below the 9 times boasted by Darden's executives.

Foolish takeaway
Based on the data provided, it's pretty easy to see that Golden Gate and American Realty are getting a pretty good deal by acquiring Red Lobster. Meanwhile, Darden will see a pretty nice windfall, but shareholders should be concerned that it's selling the chain for far cheaper than a simple read-over of its press release indicates. On top of opening the business up to investor and legal scrutiny, the transaction could be a sign that, perhaps, the company's leadership may pose more of a long-term problem than its faltering restaurant chain.

The biggest thing to come out of Silicon Valley in years
With all the problems facing Darden, one sure-fire way to create amazing opportunities while avoiding these troubles is to invest in something so revolutionary that it could send your portfolio soaring!  

If you thought the iPod, the iPhone, and the iPad were amazing, just wait until you see this. One hundred of Apple's top engineers are busy building one in a secret lab. And an ABI Research report predicts 485 million of them could be sold over the next decade. But you can invest in it right now... for just a fraction of the price of AAPL stock. Click here to get the full story in this eye-opening new report.

Daniel Jones 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.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

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.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

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. The show is also heard weekly on dozens of 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. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers