December 10, 2013 6:18 pm
Darden Restaurants: Food fight
activist investors can cook is not the point. Only serve them hors d’oeuvres
and they will storm the kitchen, whatever their culinary talents.
Darden Restaurants is learning. The parent company of the
languishing Red Lobster and Olive Garden restaurant chains has offered some
nibbles, such as $50m in cost cuts, to agitator Barington Capital. While
appetising, they fall short of the heaping platter of spin-offs Barington
craves – and which, if enacted, could lead to indigestion.
at the major “casual dining” (cheapish, waiter service) chains fell nearly a
fifth between 2006 and 2012, JPMorgan says. The troubles are not just about
the weak US consumer or the rise of “fast casual” (cheaper, counter service)
chains such as
Chipotle. Darden has not adapted. Operating expenses ate up 10 per cent
of revenue in the 2013 financial year, twice the level of rival
Brinker (the parent of Chili’s). Its capital expenditure to revenue
ratio of 8 per cent also looks high. As such, Darden’s hefty dividend takes
up much of its $300m in free cash flow.
Barington’s most daring demand is that Darden break itself up. Its smaller
chains would be put into a new company, which could trade at a higher
valuation given that – unlike Olive Garden and Red Lobster – they have
positive same-store sales growth. Yet this new company could take some of
the $150m in cost cuts Barington also wants away with it.
spicier idea is a flotation of Darden’s sizeable property portfolio.
Property companies tend to trade on higher multiples than restaurant
companies, and Morgan Stanley estimates that floating the division could
boost total shareholder value by 25 per cent. Risk lurks, though. The move
requires Darden to become a debtor to the property company, since it must
lease space and leverage would spike.
Barington’s spin-off ideas are not necessarily unwise, but they are trickier
than presented. And the menu of fixes still lacks a plan to grow sales again
at the flagship chains.
the Lex team in confidence at