ORLANDO, FL - It's no industry secret that the Starboard Value hedge fund thinks that Darden Restaurant's Board of Directors has failed their shareholders over the past year, but having been ignored so far by Darden executives, it's amping up its criticisms with a recent stock acquisition. Starboard has increased its stake in Darden stock to 7.1%, a 0.9% increase from its stake in the restaurant giant since last May.
Starboard hopes that this increased stock will translate into an increased say in the way Darden does business going forward, especially in light of Darden's announcement that it will sell its Red Lobster chain for $2.1 billion, a move which some analysts have been highly critical of.
“The value destruction relative to the true value of Red Lobster inside of Darden was likely well over $1 billion – approximately in line with the $1 billion in market value that Darden’s stock has lost relative to peers. This marks a truly disastrous end to Darden’s ownership of its first iconic brand,” Starboard CEO Jeffrey Smith said.
Analysts at the Motley Fool looked a bit deeper into the wisdom of this sale in a recent article. After factoring in expenses, Darden should walk away with $1.6 billion from the sale, $1 billion of which it plans to use to pay down its outstanding debts. This move should reduce Darden's interest payment expenses by $12 million annually. The remaining funds will be used to buy back shares of Darden stock so as to make ongoing dividend payments more manageable.
Is this the right course of action however? Motley Fool analyst Jon Quast isn't so sure. Even if Red Lobster wasn't meeting investor expectations, Quast points out that as a result of the sale, Darden will be depriving itself of $100 million in annual revenue, all in the name of reducing interest payments by $12 million per year and executing a buyback/dividend plan that won't generate new revenue for the business. He questions if perhaps the money might be better spent expanding Darden's Yard House chain of restaurants, which boast $8.5 million in sales per unit and 20.1% sales growth during 2013.
The decisions made over the coming months will have a big effect on the future profitability of Darden, and Starboard is committed to having a say-so in this process. It's been pressuring Darden for months to replace its current Board members with a slate of Starboard's own candidates. So far, Darden has remained committed to its board members, but if this latest stock acquisition is any indication of what is to come, Starboard is not willing to take no for an answer.
