Why Darden Restaurants Just Replaced Its Entire Board of Directors

Activist investors -- one; Darden Restaurants -- 0.

Steve Symington
Steve Symington
Oct 15, 2014 at 10:30AM
Consumer Goods

Shareholders of Darden restaurants just voted to replace its entire 12-member board. Credit: Darden.

It's not often you see a company's entire board of directors ousted in one fell swoop. But that's exactly what just happened to Olive Garden parent Darden Restaurants International (NYSE:DRI) this week. Darden confirmed in a press release Tuesday that, thanks to a shareholder vote at its 2014 annual meeting, its entire 12-member board will be replaced with individuals nominated by activist investor company Starboard Value. 

Starboard, for its part, owns an 8.8% stake in Darden, and is fresh off submitting a jaw-dropping 294-page presentation outlining exactly what it thinks needs to be done to revive the struggling company's flagship chain. Those suggestions notably included simplifying Olive Garden's menu, increasing its focus on higher-margin alcohol sales, and scaling back the size and number of breadsticks each table receives at one time.

While it's surprising on the surface, this complete board overhaul wasn't entirely unexpected. In fact, it all began back in May, when Darden decided to sell Red Lobster for $2.1 billion -- or roughly nine times trailing 12-month EBITDA -- to private equity firm Golden Gate Capital without putting the matter to a shareholder vote. Darden's board said at the time they had contacted a "broad universe" of potential buyers, as well as a "significant number of real estate buyers to facilitate attractive sale-leaseback financing for the purchase." But, in the end, they insisted the Golden Gate deal easily represented the "superior value-creating alternative."

Unsurprisingly, however, Starboard argued there were better ways to create value, and the resulting tensions sparked Starboard's quest to remove Darden's entire board.

This basket will probably get smaller under Starboard's leadership going forward. Credit: Darden.

To its credit, Darden did attempt to appease Starboard in the months leading up to the annual shareholder meeting. For example, shortly after Darden announced its CEO of nine years, Clarence Otis, would step down in July, it also offered three board seats to the activist investor. But, when Starboard criticized the offer as a "token change," and insisted anything less than a total board replacement would be inadequate, Darden followed up with multiple open letters to shareholders and a release decrying Starboard's statements regarding a lack of value in the Red Lobster deal as "inaccurate and misleading."

After concluding from extensive talks with other shareholders that the odds of losing the proxy battle were very high, only then did Darden finally offer last month to replace eight of its 12 independent directors. If Darden's final offer would have been approved, four of those eight directors would have been nominated by Starboard. Alas, it wasn't, and Darden now has 12 fresh new Starboard-approved board members leading the way.

An ominous warning
However, investors should also remember Darden's warnings that Starboard's quest comes with risks of its own. In another open letter to shareholders early last month, Darden argued such a board revamp could result in destabilization. Specifically, Darden says, it could disrupt the positive results it was already seeing from its current operating initiatives.

Sure enough, less than two weeks ago, Darden issued a conveniently timed press release touting a 0.6% same-store sales increase at Olive Garden. That might not sound like much, but must have felt great for Darden as it represented the chain's first same-store sales gain during the past five quarters.

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That's not to say Starboard's comprehensive plan to create value doesn't have at least some merit. But if Darden's prediction of destabilization comes to fruition, don't be surprised if last month's long-awaited gains prove short-lived while Starboard begins to implement its own way forward.