Darden Restaurants (DRI 0.14%) has been under fire from activist investors since before it decided to sell its Red Lobster-branded restaurants in July. Now, the focus has shifted to the Olive Garden brand.
Source: Wikipedia.
Basically, investors feel that the Olive Garden brand could be so much more. In a 294-slide presentation, Starboard Value, owner of 8.8% of the company, laid out a "transformation plan" for the company.
So, what do the activists want to see changed? And, what could be in store for Darden in the future?
The activists haven't really gotten their way so far
As I briefly mentioned, Darden's activist investors, led by Starboard, did not agree with the company's turnaround strategy, especially the decision to sell the Red Lobster brand. Starboard wanted the shareholders to be able to vote on this; but Darden went ahead and sold the restaurants to Golden Gate for $2.1 billion.
As a result of the fallout, Darden's CEO, Clarence Otis, announced his intention to step down as chairman and CEO by the end of the year. In addition, the company is only nominating eight candidates to its 12-member board to be voted on at its October 10 annual meeting, ensuring that at least four board seats will go to Starboard's nominees.
However, Starboard is going for more of a clean sweep, nominating its own panel of 12 nominees to completely take control of the company, and implement its own turnaround plan.
What Starboard wants to see happen
In the aforementioned 294-slide presentation, Starboard outlined its "transformation plan" for Darden, with a particular focus on Olive Garden, which was the focus of 60 of the pages. Basically, Starboard feels that Darden has lost its way, and that there is tremendous unrealized opportunity in all of the company's brands, especially Olive Garden.
Starboard's priorities include overhauling the company's leadership by installing its own Board of Directors, and appointing a "transformational leader" as CEO. The presentation claims that Darden's current board has done a poor job of allocating capital. Starboard also wants to improve the culture for Darden employees, focus on return-on-capital, and reduce bureaucracy in the company.
In one sentence at the beginning of the presentation, Starboard claims that its goal is to "dramatically improve Darden for the benefit of its customers, employees, and shareholders."
To put some numbers behind its plan, Starboard claims to have identified specific, quantifiable opportunities to increase annual EBITDA by as much as $326 million, which will create between $15 and $26 in additional value per share, or up to 50% more than the current stock price.
And these numbers don't include the potential value that could be added by transforming Olive Garden. Starboard aims to return Olive Garden to Italian authenticity, make service a top priority, and continuously innovate the brand in order to stay relevant from now on.
There are plenty of specifics outlined in the plan; but quite frankly, it's impossible to discuss them all individually. Therefore, here is the full presentation.
Darden's response
On September 23, Darden issued an open letter to its shareholders, urging the election of Darden's eight nominees to the board, and allowing the company to proceed with its own turnaround plan.
The company says it is simply not in the best interest of shareholders to elect an entirely new board. Furthermore, Darden claims that many aspects of Starboard's turnaround plan are actually its own operating initiatives.
Darden also claims that there is real, measurable progress being made at Olive Garden, which is being essentially ignored by Starboard in its criticism. For instance, guest satisfaction scores are improving, and the take-out business is seeing higher sales.
Finally, and perhaps most likely to sway investors, Darden claims that Starboard has misrepresented the company's stock performance in order to further its agenda with investors. The company claims that, in fact, the stock price has meaningfully outperformed its peers since the Red Lobster sale announcement, and that Starboard is simply cherry-picking arbitrary data in order to distort the relevant time frame.
Will Starboard succeed?
That remains to be seen, but several proxy-advisory firms are siding with Starboard, including Institutional Shareholder Services (ISS), and Glass Lewis & Co. Both firms have recommended the approval of all 12 of Starboard's recommendations, which is significant given the companies' generally cautious track records. For example, ISS has only recommended removing an entire board of directors three times in the past four years.
On the other hand, there has been some vocal opposition to the potential removal of the board, particularly by Darden's employees, who worry that Starboard's "cost-cutting" measures could result in a large number of job losses.
However, it does seem like there is a very real chance of Darden's current leadership losing control of the company. And if Starboard succeeds, it will definitely be interesting to see if the new leaders of the company will be successful in delivering on the ambitious claims in their presentation.
