DRI: REMOVING DARDEN FROM INVESTING IDEAS

05/16/14 02:14PM EDT

Darden announced earlier today 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 this with Smokey Bones and has now done it again with Red Lobster.

DRI: REMOVING DARDEN FROM INVESTING IDEAS - ClarenceOtis Pinched1 624x420

What’s shocking about this transaction is that shareholders explicitly told management and the board not to sell or spin off 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.

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 for us to like the stock in the immediate-term.  The management change shareholders are longing for is unlikely to occur until later this year.

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