DRI: Twice-Cooked, Half-Baked

Today, Darden announced that it has entered into a definitive agreement to sell its Red Lobster business and related assets to Golden Gate Capital for $2.1 billion in cash.  Destroying a business and giving it away for free is a familiar practice for CEO Clarence Otis.  He first did it with Smokey Bones and has done it again with Red Lobster.


What's shocking about this transaction is that shareholders explicitly told management and the board not to sell or spinoff Red Lobster without their approval.  By pushing through this sale, the company has once again displayed a complete lack of corporate governance and an egregious disregard for shareholders.  In our view, the stock reaction to this news has all but sealed the fate of management come the annual meeting in September.


Thoughts on the transaction:

  • More shareholders will be in Starboard’s camp when the annual meeting rolls around.
  • It creates a bigger mess for shareholders when the new board takes control of the company.
  • If the “pig” Red Lobster is worth 9x EV/EBITDA, what would the other brands be worth with a better management team?
  • Will more activists enter the fray to relieve management and the board of their conflicted duties?


Management is intellectually dishonest with this transaction:

  • The sale-leaseback transaction with American confirms $4 to $5 billion in real estate value.
  • They could have done a sale-leaseback transaction and not given away Red Lobster for free.
  • They previously said there are significant debt breakage costs associated with a sale-leaseback, yet they are now paying down debt with the proceeds from the sale.
  • According to management, it did not make sense to do a transaction by separating out the real estate and now it’s being done.
  • According to management, “many shareholders have expressed the view that an attractive sale of Red Lobster would be a favorable outcome for Darden shareholders.”


The deal is expected to close in the first quarter of FY15. 


Our bullish thesis on DRI hinged on a management change that would, in our opinion, be a catalyst for significant value creation.  With the sale of Red Lobster and the implied 10% to 15% decline in the earnings power of the company, it’s difficult to like the stock in the immediate-term.  The management change shareholders are longing for is unlikely to occur until later this year.


More details to come.


Howard Penney

Managing Director


Fred Masotta


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