Like a tag-team wrestling duo, Barington Capital and Starboard Management are each taking turns slamming Darden Restaurants (NYSE:DRI) with a folding chair over its plan to spinoff the Red Lobster chain. It's not that they don't want the seafood restaurant knocked out from the portfolio, but sending it off on its own, as management seeks to do, will not maximize value for shareholders.
If Eddie Lampert has taught us anything with Sears Holdings (NASDAQOTH:SHLDQ), it's that a mashup of ailing concepts doesn't produce a winning combination. Kmart and Sears are in a death spiral because the hedge fund operator thought he could work financial magic on them without investing in the stores, and the miserly oversight of them caused their futures to dim considerably.
Barington and Starboard think Darden is setting up the restaurant to fail because it is sickly and needs support to not only bring it back to health, but ensure that investors reap appropriate rewards. Barington recently said the spinoff proposal was "incomplete and inadequate" and, earlier this week, Starboard piled on by urging Darden to delay the strategic review process and to take a more expansive view, because the path its on will "destroy shareholder value."
In a letter to management, Starboard said Red Lobster performs so poorly as it is that separating it will have it trade at a discount even to Darden, which itself is trading at a discount to the underlying businesses it owns and the real estate it possesses. Shedding the chain could put investors in an even worse spot than they already find themselves.
Red Lobster is a problem in and of itself, but a sale or spinoff does nothing to address the rest of the issues confronting Darden. Olive Garden, for example, while in slightly better shape than Red Lobster, has only been able to mask the declines in traffic and same-store sales it's experienced through the short-term fix of price increases. The restaurant operator needs to address the problems therein, as well as confront the bloated operations in the rest of its business -- a bloat that's happened while new and varied restaurants were added to the mix, like Capital Grille, Eddie V's, and Yard House.
In short, Starboard is saying it's good to be thinking about how to fix the situation, but slow down because a more holistic approach is needed, one that includes stuffing all its properties into a real estate investment trust.
As I've noted previously, the problem for Red Lobster, Olive Garden, and other casual dining chains is that consumers have grown exceptionally cautious with their discretionary spending, and dining out is an easily sacrificed expense. If a family is going to eat out, by and large it's occurring at fast causal chains like Chipotle Mexican Grill (NYSE:CMG) and Panera Bread (NASDAQ:PNRA.DL), which balance good food, fair prices, and quick service. Those concepts have enjoyed an 8% increase in traffic during the past year, according to the analysts at NPD; casual dining and family dining restaurants were at best flat, but also suffered declines.
Darden, however, essentially said thanks, but no thanks. It's looked at all these options, and found them wanting, particularly the idea of a REIT, which it previously said would only offer a limited "value creation opportunity" because it would likely trade lower than other REITs. It maintains its plan is best, and remains committed to pursuing it.
There's no real consensus even among the hedge funds agitating for change of how to repair the restaurant operator. Barington wants it broken it up into three separate units, one housing Red Lobster and Olive Garden (but see Sears above), another housing Longhorn Steakhouse with the smaller, growing concept chains, and a third being a REIT. I think YardHouse itself could be a good stand-alone IPO, but there are plenty of ways to dice up this amalgamation of restaurant chains.
What's clear, though, is this is quickly devolving into a steel cage free-for-all death match, and it will be interesting to see who emerges victorious.