DRI: LIGHT GETS IN

“There’s a crack in everything.  That’s how the light gets in.”

-Leonard Cohen

Here is the good news: Clarence Otis is stepping down as Chairman and CEO of Darden Restaurants and the company will separate the Chairman and CEO roles.  Otis will continue to serve as CEO until his successor is appointed or by December 31st, 2014.  A search for his replacement will begin immediately.

In addition, Darden announced it will nominate up to nine of its independent directors for election at the Annual Meeting on September 30th, 2014, effectively giving Starboard three seats on the Board.  Darden continues to pursue a proxy settlement with Starboard, but the two sides have been unable to come to an agreement. 

Starboard needs to get control of this company – and they know it.

The joy of this news is tempered by the fact that Charles Ledsinger, Independent Lead Director, will become Non-Executive Chairman of the Board, effective immediately.  In our view, Ledsinger represents part of the old guard at Darden which oversaw substantial value destruction at the company, including the sale of Red Lobster.  Rewarding him this role should be temporary, because the company needs wholesale changes.

Mr. Otis and the current board were once considered the biggest obstacle to our long thesis.  The shift is beginning, but how far will the company go?  Mr. Otis dug his feet in to fight off the activists and leaves a lasting impression on the company, with the Red Lobster fiasco being his signature dish.  It will take time to fix the disaster he created.

But that’s the past.

Darden has essentially given Starboard three seats on the Board, but the activist wants more.  In fact, they've publicly shared their intentions to replace the entire Board.  This makes a settlement unlikely and while we doubt they'll gain all twelve seats, we'd be willing to bet they get the majority (at least seven) of them.  If this comes to fruition, we could see more wholesale changes on the way, including a new Chairman and management team.  As it stands, we think these three are strong potential candidates for the following roles:

Chairman of the Board: Jeffrey Smith (Managing Member, CEO and CIO of Starboard Value)

Chief Executive Officer: Brad Blum (former President of Olive Garden and Starboard consultant)

Chief Operating Officer: Bob Mock (former Executive VP of Olive Garden and Starboard consultant)

Restoring Olive Garden to the most respected brand in casual dining is the first thing any new management team must do.  While there are other things that need to be done as well, we suspect that bringing in two seasoned restaurant executives like Brad Blum and Bob Mock to reshape the company, specifically Olive Garden, would not only be well-received by the street, but also by current employees of Darden.

While there is still much uncertainty, today’s news is a significant step in the right direction.  This is the first crack to open up in Orlando and while there’s some light, we know the future can be much brighter.

More needs to be done.

Call with questions.

Howard Penney

Managing Director

Fred Masotta

Analyst