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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