Darden Restaurants, Inc. (NYSE:DRI) announced today that it had signed a deal to sell its Red Lobster restaurants and real estate to Golden Gate Capital for $2.1 billion. The company is expected to net $1.6 billion after taxes.
Darden’s deal to spin off the 700 restaurant Red Lobster division has come to fruition despite significant opposition from activist shareholders. A number of activist investors have opposed Darden’s plans to just sell Red Lobster, arguing the company should sell both Olive Garden and Red Lobster, and leave Darden Restaurants, Inc. (NYSE:DRI) with only its more successful chains such as Longhorn Steakhouse and Capital Grille.
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RBC Capital markets published an Equity Research Note on Darden Restaurants, Inc. (NYSE:DRI) today, May 16th, after the company officially announced the Red Lobster sale. They point out that the sale of Red Lobster essentially turns Darden into a “high dividend yielding company”. RBC currently rates Darden as Sector Perform.
According to RBC Capital analysts David Palmer, Jack Kindregan and Eric Gonzalez, the key question now is what happens next with Olive Garden. Will the company move forward with its turnaround plans or can activist investors force a divestiture of Olive Garden as well?
The report notes that sales at both Red Lobster and Olive Garden have been slipping over the last few quarters, as customers are switching to more casual chains such as Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA). However, Darden Restaurants, Inc. (NYSE:DRI) sees more potential in a come back for Olive Garden than Red Lobster. The company believes that Olive Garden fits well with its other, higher-end restaurant chains where diners are willing to spend more.
Darden Restaurants, Inc. (NYSE:DRI) revamped the logo for the iconic American Italian restaurant and has blended in several lighter menu items, as well as smaller dishes that fit with modern eating trends.
The company currently operates more than 830 Olive Gardens across North America.
Red Lobster – Darden: Deal only minimally dilutive
The RBC report also highlights that this deal is really only minimally dilutive. Granted Darden Restaurants, Inc. (NYSE:DRI) announced the transaction will have a dilutive impact to FY15 earnings, but the company did not provide any specific guidance.
RBC Analysts Palmer et al summarize their perspective below. “We are currently estimating EPS of $2.78 for FY14. However, we believe the dilutive nature of this deal in FY15 undersells the full future impact, since overhead reductions (~25% of current G&A) and share repurchases (up to $700mm) will not happen instantaneously. The full implementation of these programs could lead to a net accretive transaction by FY16. While some activist hopes will diminish with this transaction, we do believe that the new Darden Restaurants, Inc. (NYSE:DRI) should be given a higher multiple than the old Darden.”