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The hedge fund community has historically stayed away from DRI, but this is no longer the case.

DRI is now in the top ten holdings of hedge funds in the restaurant space.  At 14% ownership, Darden is slightly above the restaurant space’s overall average of 12% and well above the 9% average we see when excluding WEN, BKW, and BAGL.

Between 2010 and 2012, hedge funds have only owned between 2-4% of Darden’s shares based on publicly reported holdings.  This number briefly rose to 6% in late 2010 but, in general, Darden’s management team has never been under the microscope of the outspoken hedge fund crowd.

This all changed in May 2013.  Hedge funds now own 14% of the company—8% of which is accounted for by Starboard and Barington—and there is a growing list of other investors that are looking for the company to make significant changes.  This story is far from over and we imagine that the list will only grow from here.

The obvious risk to this setup is if management continues to dig their heels in and these hedge funds don’t stick around to see how the story plays out.  On the other hand, we believe that if this comes down to a proxy fight, and the hedge funds are still very much involved, the management team of Darden will not survive in its current form.

Tomorrow at 11am, Barington will make a formal presentation highlighting its plan for change at Darden and, in the following weeks, we expect to hear from Starboard about their value creation plan.  As sophisticated investors begin to reveal their case for significant upside to DRI stock, the pressure cooker will continue build.  We’d be very surprised if management is able to withhold this pressure.

While we look forward to hearing Barington’s presentation tomorrow, something tells us that management’s response will be the highlight of the day.

DRI: THE PRESSURE COOKER IS BUILDING - 1 29 2014 2 28 03 PM

Howard Penney

Managing Director