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In another sign of the increasing influence of activist investors, the pace of activist campaigns resulting in board seats is running at a five-year high.  

According to FACTSET, in the first two months of 2014, activist investors were granted one or more board seats at 16 U.S. companies, the most since 2009 when 22 campaigns at 21 distinct companies resulted in board seats. 

These trends are supportive of our bullish bias toward Darden.  We contend that buying DRI today represents a generational opportunity in the restaurant space, as the stock is currently trading at a significant discount to its underlying asset value.  In our view, there remains the potential for tremendous upside if we see Starboard successfully stop the spin-off of Red Lobster and we see a forward-thinking, seasoned restaurant operator running the company. 

The FACTSET study cited several factors which may be contributing to this recent concessionary approach of U.S. companies.  Perhaps the most important one is the widespread support activists are getting from mainstream institutional investors – a factor which we believe is being lost on Darden’s current management team.  The study showed that 60% of the proxy fights for board seats that went to an actual vote in 2013 resulted in a partial or outright victory for the activist. That's the highest win rate in the 13 years we have been tracking this data. By comparison, in 2003 the activist win rate was only 39%.

Darden’s current CEO has done nothing but destroy shareholder value over the past five years.  The company finds itself in an eerily similar position as MCD, SBUX, and EAT, not too long ago, when these companies tried appealing to the masses and began growing units too fast.  Not surprisingly, the road to recovery for each company was essentially the same, barring some obvious nuances.

Change is in the air at Darden. 

DRI: CHANGE IS INEVITABLE - activi

Howard Penney

Managing Director

Fred Masotta

Analyst