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Darden's activist fight may be exactly what stock needs

Chris Nichols
Olive Garden is introducing a new logo to signal broader foundational changes the restaurant is making to update its brand. (PRNewsFoto/Olive Garden)

Darden Restaurants (DRI), under siege for months from activist investors, kept the battle going Monday with a lengthy defense of its handling of the Red Lobster sale, saying it had to answer a series of "inaccurate and misleading statements" about its operating expertise. And that may be just what the stock needs.

A week after announcing that Clarence Otis would be quitting his chairman and CEO roles and that it would clear the way for activist firm Starboard Value to take over some of its board seats, Darden said the investor group was wrong in its critiques of the company's processes. After that, shares of Darden were higher on the day by 2.3% to $47.71. However, that's more likely because the commentary will only cause Starboard to press even further for change, rather than because stockholders were applauding the company's spirit. Considering the history between the sides, there's absolutely no question about whether we'll see future rounds -- the question is whether it gets really uncivil. The shares remain down 9.3% since the end of 2013.

Concession to activists

One might think it's an ugly situation, either the fault of a stubborn management team or a fine enterprise getting assailed by raiders. Regardless, it's not uncommon for activists to have an uplifting effect on stocks when they get involved because traders hope they'll manage to "unlock value" by forcing a new direction. That hasn't happened yet for Darden, but if the company further concedes ground, the stock's fortunes may turn in the months ahead. As long as Darden is entrenched, the investors will be, too. And that may well mean the year-to-date loss is only going to shrink.

Starboard, which says it owns about 8% of Darden's stock, has been supporting a break-up of the company for some time, as has investor Barington Capital. They met part of their goal earlier this year, when Darden agreed to sell Red Lobster, the seafood chain that had been struggling to draw customers. Still, the activists haven't been happy with Darden's approach to its real estate holdings, and they also wanted the company to drop Olive Garden, its other big brand that's seen growth in diner counts wane. Darden, the activists believe, should be concentrating on its smaller restaurants, such as The Capital Grille and Seasons 52. The company doesn't agree, and is instead trying to restore Olive Garden, in part, by offering new menu items and remodeling interiors.

On Monday, Darden said the Red Lobster sale was in the best interests of the business and stockholders and that it didn't "rush" through the $2.1 billion deal with Golden Gate Capital. Darden said it began reviewing its options early last year, adding that it thinks it got an admirable price for the division. Those comments were in response to prior remarks from Starboard that the company had erred in signing the agreement.

Making changes

The last few months have been rather extraordinary for Darden, with the activists consistently taking their message to the public that the company is managed badly. Now, Red Lobster is gone, and soon, the longtime CEO will be replaced.

Darden's sale of Red Lobster, a restaurant with more than 700 stores, occurred as American eating habits are undergoing significant change. While the U.S. now has about 1 million restaurants, casual-dining and fast-food operators have seen their guests depart for fast-casual chains, where traffic has been expanding. Revenue generally has been flat, or even risen slightly, though that's been primarily a result of small, yet consistent, price increases.

Even though Darden's problems weren't entirely about its brands and reflected broad industry challenges, Barington said in March that the board needed to consider firing Otis. And on July 28, Darden said it would separate the chairman and CEO positions, that it was naming a new chairman and that Otis would step down as CEO by Dec. 31. That same day, Darden announced it would nominate nine directors for 12 board seats at the annual meeting, which would ensure "that at least three of the nominees proposed by Starboard Value L.P. and its affiliates would be elected."

Starboard wasn't impressed, saying of Otis' plans that it was "surprising to us that it took this long" and that Darden's nomination of nine director candidates was "a transparent tactic designed to manipulate and maintain the problematic status quo majority."

Taken together, it all means to expect plenty more bashing ahead. And maybe, along with it, an even higher stock price.