Darden Restaurants Inc. (DRI) investor Starboard Value LP is starting a proxy battle to take over the board, seeking to block the company’s deal to sell the Red Lobster chain for $2.1 billion.
Starboard, which owns about 6.2 percent of Orlando, Florida-based Darden, nominated a slate of 12 directors for election at the restaurant company’s annual meeting, according to a letter to shareholders today. If approved, the directors would replace the entire board.
Darden drew the ire of Starboard in December when it first proposed selling or spinning off Red Lobster, a seafood chain that has suffered from declining sales. Starboard sought for shareholders to vote on the idea, only to see Darden make a deal with Golden Gate Capital last week to sell Red Lobster.
“The Red Lobster sale is unquestionably a bad deal for shareholders,” Starboard said in the letter. “Despite the current management and board’s obvious contempt for shareholder interests, a tremendous opportunity still exists to unlock substantial value at Darden. However, realizing this opportunity will require substantial change to the composition of the board.”
According to Starboard’s analysis, Darden is selling Red Lobster for just $100 million more than the value of the chain’s real estate, which could have been sold tax-free. That implies Darden is “essentially giving away the Red Lobster operating business, an iconic brand with $2.5 billion in sales,” for less than one year’s earnings before interest, taxes, depreciation and amortization, Starboard said.
Darden shares rose 1.7 percent to $49.51 at the close in New York. The stock has dropped 8.9 percent this year.
Starboard and another activist shareholder, Barington Capital Group LP, have been lobbying Darden to consider other options, such as splitting off its property as an independent real estate investment trust. Barington has said that the Red Lobster transaction was a “fire sale” that destroyed more value than it created.
Darden said today that it was confident its actions would create value for shareholders, calling Starboard’s analysis “incorrect and unrealistic.”
“Over the past months, we have had extensive conversations with our shareholders about Darden and the company’s strategic direction,” Darden said in a statement. “The recently signed agreement to sell the Red Lobster business and the actions under way to reinvigorate restaurant performance, reduce costs and ensure a sound financial foundation to support Darden’s dividend reflect the input we have received.”
The planned Red Lobster sale, announced on May 16, will generate about $1.6 billion in proceeds, of which about $1 billion will be used to retire debt. The remainder will fund a share buyback program of as much as $700 million.
Golden Gate already has agreed to sell about 500 Red Lobster locations to American Realty Capital Properties Inc. for about $1.5 billion and then lease back the spaces.
Darden said it will consider Starboard’s board nominations, though the move to replace all 12 directors would be a play for “effective control of the company -- representation which is disproportionate to Starboard’s recently acquired approximate 6.2% stake in Darden and which does not offer Darden shareholders a control premium for such change in control.”
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