Darden Plans Spinoff For Red Lobster Under Activist Pressure

Darden Restaurants, Inc. (NYSE:DRI), which has been under intense pressure from activist hedge fund Barington Capital Group, announced on Thursday that it would spin off its Red Lobster chain in a move to see more from Darden’s stock value.

Darden denies Red Lobster sale

While today’s announcement suggested that Darden Restaurants, Inc. (NYSE:DRI) would hold a tax-free spinoff of Red Lobster shareholders, Darden refused to outright deny that it wouldn’t consider an outright sale of its Red Lobster brand.

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“As consumer demand dynamics have changed, Red Lobster’s priorities and operating support requirements have come to differ meaningfully from those of Darden’s other brands,” Darden said in a statement. “As a separate company, Red Lobster will have greater freedom to pursue marketing and operating strategies that are more tailored to the needs of those consumers who fit its core guest profile.”

Darden split off its properties

Whether this will be enough to satisfy activist hedge fund Barrington Capital Group is another matter. In September, Barrington called for Darden to split off its properties into as many as three groups. It’s been widely reported that Barrington would like to see Darden Restaurants, Inc. (NYSE:DRI)’s properties, LongHorn Steakhouse and the Capital Grille go their own way either separately or together as their growth is considerably greater than that of the Olive Garden and Red Lobster chains. Additionally, Barrington has called for a “sell-and-lease-back” strategy for Darden’s vast real estate holdings. Alternatively, Barrington sees value in packaging Darden’s holdings into a publicly traded real estate investment trust.

“While today’s announcement is a first step toward improving focus and operating execution at Red Lobster and Olive Garden, we view the plan Darden Restaurants, Inc. (NYSE:DRI) announced today as incomplete and inadequate,” James Mitarotonda, the hedge fund’s chief executive, said in a statement. “The plan fails to address significant additional opportunities to enhance long-term shareholder value, including placing its real estate into a REIT. We believe that Darden can and should be doing more to improve value for its shareholders.”

Darden to slow or halt Olive Garden expansion

In addition to the Red Lobster spinoff, Darden Restaurants, Inc. (NYSE:DRI) announced that it will slow or halt its expansion of its Olive Garden restaurants while slowing the acquisition of new properties for the LongHorn Steakhouse Chain. These moves would lower capital spending by no less than $100 million each year.

When Americans tighten their wallets, funds like Barrington target companies like Darden Restaurants, Inc. (NYSE:DRI), which wears a bulls-eye in an industry where it has a market value of nearly $7 billion. Since the fight with Barrington began, Darden has retained Goldman Sachs as its financial adviser, Latham & Watkins as its legal counsel, while Wachtell, Lipton, Rosen & Katz is serving as a legal adviser to the board of Darden.