Activist hedge fund, Barrington Capital, is demanding drastic solutions to improve the profitability of Darden Restaurants, Inc (NYSE:DRI), the owner of Olive Garden and Red Lobster.
Barrington pressuring Darden restaurants
According to a report from the New York Times, the activist hedge fund is encouraging the board and management of the restaurant operator to explore strategies such as leasing, selling its real estate, or spinning off its huge holdings into a publicly traded real investment trust. Barrington Capital estimated that the real estate holdings are worth around $4.1 billion.
Barrington Capital also urged Darden Restaurants, Inc. (NYSE:DRI) break up its mature brands, such as Olive Garden and Red Lobster restaurants, from its faster-growing chains such as Longhorn Steakhouse, the Capital Grille, and Bahama Breeze.
James Mitarotonda, founder of Barington Capital, argued that Darden Restaurants, Inc. (NYSE:DRI) changed itself and became more complex, burdened, and less nimble and innovative.
“We believe that Darden has the potential to deliver significantly higher returns to shareholders and anticipate continuing our ongoing dialogue,” according to Barrington Capital. The activist hedge fund is representing a group of shareholders with more than 2 percent stockholdings in the company.
Darden Restaurants enhancing shareholder value
Darden Restaurants, Inc. (NYSE:DRI) said that it “welcomes input toward the goal of enhancing shareholder value.” The company said its board would take the time necessary to evaluate all the recommendations of Barrington Capital.
Earlier this month, Darden Restaurants, Inc. (NYSE:DRI) acknowledged the possibility that its credit rating will be downgraded, but reiterated its commitment to maintain its dividend. It remained confident that it would achieve growth over time.
Analyst at Bank of America, Merrill Lynch, warned that selling its properties to boost returns to shareholders without using a portion of the proceeds to reduce its debt could result in a credit rating downgrade. The analyst noted that the corporate bond contracts of Darden Restaurants, Inc. (NYSE:DRI) limits how much real estate it can sell.
Last month, the company reported weak quarterly financial results. Its net income for continuing operations declined by 37.6 percent to $70.3 million, or $0.53 earnings per share.
Analysts at JPMorgan Chase & Co (NYSE:JPM) believed that the company will experience a potential upside once it implements aggressive strategic changes. The analysts opined that Darden Restaurants, Inc. (NYSE:DRI) will be able to boost value for shareholders by increasing its FCF generation.