Red Lobster in
Times Square, a Darden restaurant. Barington Capital said if the
company separated into as many as three companies it could return
significantly more money to shareholders.
Over 45 years, Darden has grown from a single
restaurant in a landlocked Florida city to a 2,100-outlet empire, with its
Olive Garden and Red Lobster brands blanketing the country.
But as the company struggles with a stagnant stock
price, the activist hedge fund Barington Capital is calling for a drastic
solution: breaking the company into as many as three separate businesses,
according to a letter sent to its board last month that was reviewed by The
New York Times.
The plan includes separating the Olive Garden and
Red Lobster chains from faster-growing brands like LongHorn Steakhouse and
the Capital Grille. And it encourages Darden to explore either selling its
real estate and leasing it or to spin off its voluminous holdings into a
publicly traded real estate investment trust.
Still, the efforts of Barington, which says it
represents a group that owns more than 2 percent of Darden’s stock, reflects
the continued focus of Wall Street firms in the restaurant industry.
Activist investors have taken an interest in chains like Cracker Barrel Old
Country Store and Wendy’s, calling for significant changes in business
Darden is one of the biggest targets in the
industry, with a market value of $6.6 billion. But the company has struggled
financially as consumers tightened their grip on their wallets, and its
stock price has fallen 8.5 percent over the last 12 months.
Jim C. Yin, an analyst at
Standard & Poor’s Capital IQ, also said that the company was still
trying to open new stores and act like a growth company when its industry
had matured and many of its peers had instead focused on returning cash to
Last month, Darden announced that sales at Olive
Garden dropped by 4 percent and fell by 5 percent at Red Lobster, its two
biggest brands, in the first half of this year. It has already disclosed
efforts to shave off $50 million in annual expenses, including through
Now it has found itself the target of Barington, a
hedge fund that promotes itself as a constructive activist investor with a
focus on consumer and industrial companies. The firm has quietly helped spur
changes in the industry. For example, the Jones Group, the fashion company
that owns brands like Anne Klein, began pursuing a sale after the hedge fund
disclosed a stake earlier this year.
But Barington has not been afraid to take the gloves
off in earlier campaigns, either. In 2010, it publicly admonished the
Ameron International Corporation for being too generous with executive
salaries and later called on the chairman and chief executive to resign. In
2007, it put pressure on A. Schulman to replace its chief executive.
So far, the two sides have kept matters cordial,
exchanging e-mails and phone calls. And in June, Barington officials met
with senior executives at Darden to discuss how to improve the company’s
In a statement, Barington acknowledged the meetings.
It added, “We believe that Darden has the potential to deliver significantly
higher returns to shareholders and anticipate continuing our ongoing
Darden said in a separate statement: “Darden
welcomes input toward the goal of enhancing shareholder value. While it’s
the company’s policy not to comment on specific discussions with
shareholders, the company has had dialogue with Barington Capital and the
board will take the time necessary to thoroughly evaluate Barington’s
suggestions, just as the company does for any of its shareholders.”
Over the last several months, Barington has urged
Darden to broaden its overhaul efforts. In a letter to the board, sent on
Sept. 23, the hedge fund argued that the company had become too big to run
efficiently, with a multitude of brands with different needs competing for
“The company itself has changed — becoming, in our
opinion, more complex and burdened as well as less nimble and innovative,”
James A. Mitarotonda, Barington’s founder, wrote.
Such a strategy would follow in the footsteps of
Brinker International, the parent of Chili’s Grill and Bar. Brinker sold
six brands over the last decade, including Romano’s Macaroni Grill, to focus
on Chili’s and Maggiano’s Little Italy. Since announcing the sale of On the
Border in June 2010, the company’s stock has jumped 173 percent.
In the eight-page letter, Barington called for
separating Darden’s mature brands from its higher-growth chains. The former
group would acknowledge its slow-growing sales and instead pay shareholders
a healthy dividend. The latter, composed of LongHorn, Capital Grille, Bahama
Breeze and three other brands, would focus on reinvesting profits to bolster
And the hedge fund pointed to Darden’s real estate
holdings as a potentially huge untapped trove of riches whose worth it
estimates at $4.1 billion. The company owns the land and buildings for 1,048
of its restaurants and the buildings on 802 more sites. Barington urged the
company to consider moves ranging from selling the properties and leasing
them back to spinning them off into a publicly traded real estate investment
trust, which could reduce its tax bill.
The hedge fund has also suggested moving most of
Darden’s debt onto the real estate company, contending that its healthy cash
flow could support the burden while freeing up the restaurant companies’
But analysts at
Bank of America
Merrill Lynch cautioned in a recent note that any moves to sell
properties to help shareholder returns — without using some of the proceeds
to reduce debt — could lead to a downgrade to its credit rating. They also
pointed out that Darden might be limited in how much real estate it can sell
because of corporate bond contracts.
Analysts broadly agree on the problems Darden faces,
though not on the solutions. Discussions about how the company can revive
its fortunes has been “in the chatter” since the beginning of the year, said
Sara Senatore, an analyst at Bernstein Research.
Lynne Collier, an analyst at Sterne Agee, said that
Darden has some good brands that, if spun out, could fetch a higher trading
multiple. But she expressed skepticism about spinning out the real estate.
Other analysts argued that the company should remain
together, with the cash flow from the mature Olive Garden and Red Lobster
brands helping to finance their counterparts. Separating the two could harm
the growth of the younger chains.
Mr. Yin of Capital IQ argued that the two groups of
Darden chains were similar enough to each other, with not enough difference
in growth rates, to justify splitting them up.
Peter Saleh, a restaurant analyst at the Telsey
Advisory Group, said, “The question is, What are all these pieces worth? Are
they worth more if you break them up versus what they are worth today?”
A version of
this article appears in print on 10/17/2013, on page B9 of the NewYork
edition with the headline: An Activist Investor Is Urging Darden to Break
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