Will Activists Get What They Want From These 3 Restaurants?

Shareholder activism is all the rage. There are various studies that say activist investors create long-term value by shaking up a company's philosophy or management, while others argue that activists are focused on only short-term gains.

With the changing customer preferences, restaurants are seeing their stocks take a roller-coaster ride. This has attracted the attention of activist investors. Three restaurant chains currently dealing with activist investors are Darden Restaurants (NYSE: DRI  ) , Cracker Barrel Old Country Store (NASDAQ: CBRL  ) , and Bob Evans Farms (NASDAQ: BOBE  ) .

Gearing up for a fight at Darden Restaurants
Darden Restaurants has drawn the ire of activist investors Barrington Capital and Starboard Value. They are not pleased with the job CEO Clarence Otis has done and feel the company is worth more than where shares are currently trading at. They have been particularly critical of Darden's ability to turn around Olive Garden, which has struggled as more diners opt for fast-casual options like Chipotle Mexican Grill.

Source: Darden Restaurants

But what really sent the activists over the edge was Darden's decision to sell Red Lobster to Golden Gate Capital for $2.1 billion. Starboard Value sees the deal as being a great catch for Golden Gate Capital and a bad one for Darden shareholders. They see the transaction as destroying $800 million in shareholder value.

Source: Red Lobster

To enact change, Starboard Value has nominated its own slate of directors for election at this year's annual meeting. Since Starboard Value owns 6.2% of Darden Restaurants, it feels this is the only way to make their voices heard. Starboard Value just might find support from shareholders disappointed with Darden's share price. Shares are trading where they were two years ago and are down almost 12% year to date.

Just will not take no for an answer
There is probably a picture of Sardar Biglari in the dictionary when it comes to persistence. He just lost his second proxy fight with Cracker Barrel Old Country Store. To avoid a third proxy fight, the company even offered to buy his stake, but he turned the offer down. He's been pushing for a seat on the company's board and has amassed a 20% stake in the company.

Source: Cracker Barrel Old Country Store

Biglari looks to be taking a long-term view with his stake in Cracker Barrel. He already has a profit on his investment, as shares are up from $60 at the start of 2013. There is speculation that Biglari could be looking to merge Cracker Barrel with his Biglari Holdings, which owns Steak N Shake, among other holdings.

Source: Wikimedia Commons

Biglari looks to have lost the two proxy fights because Cracker Barrel management is doing a pretty good job. With the share price up, that certainly leaves few disgruntled shareholders. And its dividend yield of almost 4% keeps many shareholders happy.

In the latest quarter, management grew earnings per share 20%. Where Biglari does get credit is for keeping pressure on management because they know that their jobs are on the line and are making sure that they deliver results. So far, the results speak for themselves, and all shareholders have benefited from a strong dividend and a higher share price over the past two years.

Activist investor wants Bob Evans split up
Sandell Asset Management wants Bob Evans Farms to split up. The company is not only in the restaurant business but also makes its own line of pork sausages. After the bidding war we just saw for Hillshire Brands, many have speculated that Bob Evans Farms could be next. The meat industry is undergoing a consolidation, and its line of pork sausages would be a nice addition to another meat company's portfolio.

Source: Wikimedia Commons

Sandell Asset Management is taking its fight with Bob Evans Farms to shareholders. The hedge fund has nominated eight new board members. This would give Sandell Asset control of Bob Evans' board. The hedge fund would then likely sell Bob Evans' real estate and either spin off the packaged-foods business or sell it. The plan for Sandell Asset Management is to maximize shareholder value.

Source: Bob Evans Farms

Sandell Asset Management has a good chance of winning. Shares of Bob Evans Farms have underperformed the S&P 500 index in the past year. Further adding fuel to the fire is the fact that Bob Evans Farms has delayed its fourth-quarter earnings until July 8. This is due to Bob Evans Farms having to address weaknesses in its financial controls. This is not the sort of thing that is favorable for management, especially when they are dealing with an activist investor looking to take control of the board of directors.

Foolish final thoughts
I see activist investors as being good for shareholders. They have a big enough stake in the company to voice concerns that smaller shareholders cannot. In the end, what's important is not who wins or loses in proxy contests but that shareholder value is created.

While Sardar Biglari may have lost the proxy vote, he is benefiting as management delivers returns to shareholders. In terms of Darden Restaurants and Bob Evans Farms, the activist investors are looking to enact change to boost shareholder value. They have a good chance of winning since both Darden and Bob Evans have underperformed the market. The upcoming annual meetings for Darden and Bob Evans should be quite interesting. This Fool will certainly be watching to see what happens.

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