Darden Restaurants Inc. (DRI) Chief Executive Officer Clarence Otis, who came under fire from activist investors for his turnaround strategy, plans to step down as chairman and CEO by the end of the year.
Otis will continue as CEO until a successor is appointed or Dec. 31, whichever comes first, the Orlando, Florida-based company said in a statement. Charles Ledsinger, currently Darden’s independent lead director, is becoming chairman of the board, splitting up the two jobs that Otis had held.
Darden drew the ire of investor Starboard Value LP in December when it 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 this year to sell Red Lobster. In May, Starboard began a proxy battle to take over the board, seeking to block the $2.1 billion Red Lobster sale.
Darden has completed the Red Lobster sale, so Otis’s departure doesn’t mean the company is reversing course on that move. Still, it made a concession to Starboard by nominating just nine board candidates for election at its annual meeting in September. That leaves three free spots on the 12-member board, ensuring that those positions go to Starboard, Darden said.
“It is surprising to us that it took this long,” Starboard CEO Jeff Smith said in a statement. “Unfortunately, Mr. Otis leaving represents just one small step in the transformation that is urgently needed at Darden.”
Darden, which operates the Olive Garden and LongHorn restaurant chains, rose 4.4 percent to $46.88 at the close in New York. The stock has declined 14 percent this year.
“Shareholders were upset and disappointed by the Red Lobster transaction,” Lynne Collier, a Dallas-based analyst at Sterne Agee & Leach Inc., said in an interview. “There was mounting pressure on Clarence.”
With the company’s meeting coming up, “they may have felt they needed to make a change prior to that or they were going to lose a lot of seats,” said Collier, who has a buy rating on the shares.
According to a Starboard analysis earlier this year, 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.
Starboard and another activist shareholder, Barington Capital Group LP, had been lobbying Darden to consider other options, such as splitting off Red Lobster’s property as an independent real estate investment trust. Barington, also based in New York, also had pushed for an independent chairman.
“This board has proven over an extended period of time that it is unable to respectfully and capably represent the best interests of the shareholders they were elected to represent and cannot be trusted to make the incredibly important decision as to the selection of the next CEO of Darden,” Smith said. “There needs to be a true and complete process to vet both internal and external talent in order to find a truly great, transformational, operationally focused restaurant leader.”
Darden will get about $1.6 billion in net cash from the Red Lobster sale, it said in the statement. The company plans to use about $1 billion to pay debt, while the remainder will go toward stock repurchases in fiscal 2015.
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.
“Olive Garden, Red Lobster and LongHorn had underperformed in each of their respective sectors for a while,” said Will Slabaugh, an analyst at Stephens Inc. in Little Rock, Arkansas, who has the equivalent of a hold rating on the stock. “The activist investors thought this was largely due to a complacent board that wasn’t pushing management to get results.”
Darden has about 1,500 restaurants, excluding Red Lobster.
While Otis’s departure relieves some pressure on Darden, the company must now find the right successor to turn around its remaining chains, Collier said. A new CEO faces the challenge of a casual dining industry losing customers to faster options like Chipotle Mexican Grill Inc. (CMG)
“The revitalization efforts they’re working on can work, potentially,” Collier said. “But it will take time to turn it around -- especially when the casual dining industry seems to be losing market share at a rapid pace.”
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