Investors Ready to Storm Ramparts at Red Lobster

You just knew this was going to happen. Activist investor Starboard Value is moving to clean house at Darden Restaurants (NYSE: DRI  ) and replace the entire 12-member board of directors because of their willful ignorance of shareholder wishes.

After stonewalling investors who sought to have the restaurant chain put its separation of Red Lobster on ice until a more complete plan could be devised, Darden moved to sell the seafood chain to Golden Gate Capital for $2.1 billion, a price that Starboard and fellow hedge fund Barington Capital denounced as being woefully inadequate. It wasn't hard to figure the board would pay for its rash move, but Starboard, which owns about 6.2% of Darden's stock, making it one of the restaurant operator's biggest shareholders, blasted management in a letter to shareholders yesterday that condemned the move as "one of the most egregious violations of shareholder trust we have ever seen."

Based on Starboard's calculations, the net proceeds of $1.6 billion that Darden will receive amounts to just $100 million more than the value of the real estate that's going to Golden Gate. Had the board constructed a different deal along the lines of what the hedge fund had advocated, the transaction could have been tax free (instead of the half-billion dollar "tax leakage" the deal represents) and would have realized a higher return for investors. As it is, Darden basically gave away the Red Lobster brand at a valuation of less than its earnings before interest, taxes, depreciation, and amortization.

"While it has been clear for some time that some level of change would be required at Darden to increase and protect value for shareholders, this self-serving and value destructive Red Lobster Sale flies in the face of corporate democracy and has made it absolutely clear that the majority of Darden's current directors must be replaced at the Annual Meeting." -- Starboard Value letter to Darden Restaurants shareholders, May 22, 2014

The deal was bashed by analysts up and down Wall Street, with one even saying Darden's board effectively flipped investors the bird while others less colorfully concluded it was a poorly done transaction with little value to shareholders.

Starboard now proposes a new slate of 12 candidates to completely replace the current board. Although the hedge fund notes Darden has a long history of poor corporate governance, pointing out that Institutional Shareholder Services assigns it a rating indicating the highest level of governance risk and has instituted policies that are highly restrictive of shareholder rights, the sale of Red Lobster over the objections many if not most of its outside investors at a price that grossly unvalued the asset, is an egregious dereliction of its fiduciary responsibilities.

The candidates Starboard is putting up represents a diverse cast of nominees from finance, retail, and restaurants, including a former executive of Darden's Olive Garden chain, may just have more than a snowball's chance of winning representation. As much as I agree that certain operations of a company are wholly within the purview of management and can be done without need for shareholder approval -- and a spinoff or sale could be one of those areas -- the heavy-handed tactics employed in this case, and the lack of real value realized for investors, indicates there's a yawning chasm here between management and shareholder interests.

It will now be a contest of wills and whether Starboard Value had as much support of the shareholder base as it claims. Darden Restaurants will counter that its policies are in the best interests of the company and its investors and the shareholder meeting will likely be a raucous affair. It may be a good time to start popping the popcorn to watch as this battle unfolds.

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  • Report this Comment On May 26, 2014, at 6:18 PM, arg wrote:

    1) Building the new headquarters and the amount they spent wasn't in the interests of guests or shareholders. This was done only for the interest of Clarence Otis.

    2)Company jets provided for Otis when they are used for personal travel for Clarence Otis must stop! This wasn't in the interest of shareholders or guests! GET RID OF THE JETS!

    3)Putting Goldman Sacks on the payroll is not in the interest of shareholders or guests at Darden. Goldman Sacks interests are for themselves and Clarence Otis. Dump Goldman Sacks as soon as possible.

    4)DRI must become part of the revolution in the food business, promoting healthy menus and getting more appeal to millennials. The salads at Darden are very good!

    5)One thing the Darden board did was to stop basing Clarence Otis salary on restaurant openings. With that deal in place DRI was opening restaurants like sausages in a sausage factory, clearly benefitting Otis but not shareholders!

    6)The Barrington and and Starboard have bought shares aligning themselves with shareholders and showing confidence in themselves! In the last 3 months insiders at DRI have bought 31,686 shares and sold 245,184 shares, this shows no confidence by the management team in themselves! If Clarence Otis and other insiders want to make a show of confidence to us shareholders in what they are doing, they must buy shares otherwise we will look at what they say as BS! I don't mean a few shares either!

    7) The press wants teachers to be fired for poor performance, if DRI has another bad quarter Clarence Otis should do the right thing and quit or be Fired!

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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8/31/2015 3:40 PM
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Darden Restaurants… CAPS Rating: ***