Value Investing

Starboard Tells Shareholders To Oppose Red Lobster Spinoff

Starboard Value is lobbying shareholders to oppose the recent proposal by Darden to spinoff Red Lobster. Below is the latest from Starboard Value including a complete timeline of the fight between the activist hedge fund and the restaurant (full document via Edgar).

starboard value

Starboard Value Lp Is One Of The Largest Shareholders Of Darden Restaurants, Inc. (“darden” Or The “company”). We Believe Shareholders Deserve To Have A Forum For Expressing Their Views On The Company’s Proposed Separation Of Red Lobster.  We Are Therefore Seeking Your Support To Call A Special Meeting Of The Company’s Shareholders To Discuss This Extremely Important Issue.  We Are Concerned That The Proposed Red Lobster Separation May Not Be The Best Alternative To Maximize The Value Of Red Lobster And, Without A Meeting, Such Separation May Be Completed Without Shareholder Support.  It Is Important To Note That While The Resolution For Which We Would Seek Shareholder Approval At The Special Meeting, If It Is Called, Is Non-binding In Nature, We Nevertheless Believe The Special Meeting Is Critical For Providing An Opportunity For Shareholders To Voice Their Concerns On The Proposed Red Lobster Separation Before It Is Too Late.

We Note That Darden Apppers Unwavering In Its Commitment To Proceed With The Separation Of Red Lobster, As Evidenced By Its Announcment On March 10, 2014 That It Has Filed A Form 10 Registration Statement With The Sec In Connection With The Red Lobster Separation.  We Therefore Urge Shareholders To Join Us In Requesting That Darden Call A Special Meeting Of Shareholders At This Critical Time.  While We Understand That Neither (i) The Calling Of The Special Meeting Nor (ii) The Approval Of The Non-binding Resolution By Shareholders At The Special Meeting Would Prohibit The Board Of Directors (the “board”) From Proceeding With The Red Lobster Separation, We Nevertheless Believe Shareholders Deserve To Have Their Voices Heard On This Very Important Issue.

At This Time, We Are Only Soliciting Your Written Request To Call A Special Meeting Of Shareholders.  As Described More Fully Below, In Order To Call A Special Meeting, We Are Required To Deliver Written Requests From The Holders Of At Least Fifty Percent (50%) Of The Company’s Outstanding Shares, Including Our Own.  Once The Special Meeting Has Been Called, We Will Then Send You Proxy Materials Urging You To Vote In Favor Of The Proposal Described Below.

Please Join Us In Requesting That Darden Call A Special Meeting And Show The Board That Shareholders Want To Have Their Voices Heard Before A Red Lobster Separation Transaction Is Completed.

Why You Were Sent This Solicitation Statement

Starboard Value LP (“Starboard”) and the other participants in this solicitation (collectively, “Starboard,” “our,” or “we”) are the beneficial owners of an aggregate of 7,253,818 shares of common stock, no par value per share (the “Common Stock”), of Darden Restaurants, Inc. (“Darden” or the “Company”), representing approximately 5.5% of the Company’s outstanding shares and making us one of the Company’s largest shareholders since the filing of our initial Schedule 13D with the SEC on December 23, 2013.

On December 19, 2013, the Company announced a proposed separation of the Company’s Red Lobster business through an expected spin-off.   The Company stated in its December 19, 2013 press release that the contemplated Red Lobster separation will not require shareholder approval and that it expects to close the separation transaction in early fiscal 2015, which begins May 26, 2014.  It therefore appears that the Company intends to complete the Red Lobster separation several months before the Company’s 2014 Annual Meeting of Shareholders (the “2014 Annual Meeting”), which is not expected to be held until September.  We are seeking to call the special meeting to give shareholders a platform for potentially influencing management and the Board with regard to this material transaction.  It is important to note that the resolution for which we would seek shareholder approval at the special meeting, if it is called, is non-binding in nature and that neither the calling of the special meeting, itself, nor the approval of the non-binding proposal by shareholders at the special meeting would prohibit the Company from proceeding to complete the proposed Red Lobster separation.  Nevertheless, we believe the special meeting is critical for providing an opportunity for shareholders to express their views on the proposed Red Lobster separation before it is too late.

Since December 19, 2013, both Starboard and at least one other shareholder have expressed serious concerns with the Company’s proposed separation of Red Lobster, whether through a spin-out or sale.  Starboard does not believe that a Red Lobster separation, as currently contemplated, is in the best interests of the Company’s shareholders.  Unfortunately, to date, despite the serious concerns voiced by its shareholders regarding the proposed Red Lobster separation, the Company appears unwavering in its commitment to the proposed separation.  Further, based upon the Company’s recent filing of a Form 10 registration statement in furtherance of a spin-off, the Company appears intent on expeditiously pursuing this separation.

Darden’s long-term performance under the leadership of this management team and Board has been unacceptable.  As just one example, Selling, General, and Administrative (“SG&A”) expenses now stand at approximately 10% of sales, or 60 basis points worse than in fiscal year 2012, prior to the acquisition of Yard House, and the highest percentage since at least fiscal year 2001.  In that time, Darden has acquired four new concepts – LongHorn Steakhouse, Capital Grille, Eddie V’s and Yard House – and has more than doubled revenue, but has failed to realize any of the expected cost synergies or to see any SG&A leverage.  As a result, Darden’s consolidated margins, when adjusted for the Company’s substantial real estate ownership, are now well below peers despite having among the highest average unit volumes and the greatest scale in the casual dining space.  Even more concerning, Darden’s stock price performance has been unacceptable, with Darden underperforming its peer group by more than 300% over the last five years, as evidenced by the chart below.


Separate and apart from the attempt to call the special meeting, Starboard has expressed its desire to engage with the Company regarding Board composition and believes that immediate changes in Board composition are required at the Company.  Starboard intends to closely monitor all developments at the Company over the coming months, and may seek to elect an alternative slate of director candidates at the Company’s 2014 Annual Meeting.

Given what we believe to be management and the Board’s track record of poor performance and poor decision-making, together with our concerns regarding the proposed Red Lobster separation, we believe it is critical for shareholders in this case to have the right to review and approve any transaction involving Red Lobster that takes place prior to the 2014 Annual Meeting, at which time shareholders will have an opportunity to elect directors whom they believe represent their best interests.  While we understand that neither (i) the calling of the special meeting nor (ii) the approval of the non-binding resolution by shareholders at the special meeting would prohibit the Board from proceeding with the Red Lobster separation, we nevertheless believe shareholders deserve to have their voices heard on this very important issue.

Darden typically holds its annual meeting of shareholders in September.  Since the Company currently intends to complete the Red Lobster separation prior to holding the 2014 Annual Meeting, at which time the Company’s directors will be up for election, shareholders will not have an opportunity to have their voices heard on the Red Lobster separation, as a referendum or otherwise.  Starboard strongly believes it is imperative for the Board to have a clear picture of the lack of support among its shareholder base regarding the separation of Red Lobster and that shareholders deserve to have a forum for expressing their views on the proposed separation.  If a majority of the Company’s unaffiliated shareholders are indeed against the proposed Red Lobster separation, we believe it would be incumbent upon the Board to immediately delay any pending separation transaction involving Red Lobster.

Past contacts
The following is a chronology of events leading up to the current solicitation:
·
On December 19, 2013, Darden issued a press release announcing, among other things, that the Board has approved a proposed separation of the Company’s Red Lobster business through a spin-off or sale transaction.  In the press release, the Company stated that it expects the form of such separation for Red Lobster to be a spin-off.
·
On December 23, 2013, Starboard filed a Schedule 13D with the SEC (the “Schedule 13D”) disclosing a 5.6% interest in Darden.  In the Schedule 13D, Starboard stated that it invested in the Company based on Starboard’s belief that Darden is deeply undervalued and represents an attractive investment opportunity and that opportunities exist within the control of   management and the Board to take actions that would create significant value for the benefit of all shareholders.  Starboard further stated that it had conducted extensive research on Darden and had reviewed the proposed separation of Red Lobster as well as the second quarter financial results and believed that the plan outlined by management falls significantly short of the actions required to maximize shareholder value and that it is disappointed with the continued poor financial performance of the Company.  Starboard also expressed its belief in the Schedule 13D that there is a significant opportunity to dramatically improve Darden’s operating performance, as well as opportunities to realize substantial value from the Company’s real estate holdings and to explore other strategic options available to Darden to maximize shareholder value, including alternative business sale or separation transactions.
·
On January 8, 2013, representatives of Starboard had a discussion with certain members of management to gain a better understanding of Darden as well as the proposed separation of Red Lobster.
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Over the following week, representatives of Starboard worked with Matthew Stroud, Darden’s Vice President of Investor Relations, to schedule a meeting with management at the Company’s headquarters in Orlando, FL.  The meeting was scheduled for January 29, 2014.
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On January 21, 2014, Starboard delivered a letter to the Company’s Chairman and CEO, Clarence Otis, and the Board expressing its serious concerns with the proposed separation of Red Lobster.

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On January 29, 2014, representatives of Starboard met with certain members of management at the Company’s headquarters in Orlando, FL to discuss the proposed separation of Red Lobster and the operations of the Company.
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On February 10, 2014, Starboard delivered a letter to the Company’s Chairman and CEO, Clarence Otis, and the Board reiterating its belief that the Company’s current plan to spin-out or sell Red Lobster is not in the best interests of shareholders.
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On February 24, 2014, Starboard delivered an open letter to Darden’s shareholders informing them that it has filed a preliminary solicitation statement seeking to call a special meeting of Darden’s shareholders to provide shareholders with a democratic forum for expressing their views on the proposed separation of Red Lobster.
·
On March 3, 2014, the Company issued a press release announcing the Company’s conference call to investors and the investor presentation titled “Strategic Action Plan to Enhance Shareholder Value — Spring 2014” prepared by the Company for use during the conference call, which states, among other things, that Darden remains on track to execute its previously announced plan to separate the Red Lobster business through either a spin-off or a sale of the Red Lobster business and that the sale process is well underway.
·
On March 10, 2014, the Company issued a press release announcing that it has filed a Form 10 Registration Statement with the SEC in connection with the separation of Red Lobster.