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Why Starboard wants to change the majority of Darden’s board

Smita Nair

Overview: Starboard Value's activist position at Darden (Part 7 of 7)

(Continued from Part 6)

Starboard wants to change Darden’s board

Activist investor Starboard Value has launched a proxy fight to gain control over the board of Darden Restaurants (DRI), after opposing the sale of the company’s Red Lobster seafood chain to private equity company Golden Gate Capital. The activist fund currently owns an ~8.8% stake in the restaurant company.

Darden recently announced its CEO’s departure and gave Starboard the choice to nominate its own members to three seats on the board after announcing that it will nominate only nine members at the annual meeting. Darden said its board will continue to be comprised of 12 members until a new CEO is appointed in accordance with a leadership succession plan. It also said that it has engaged in settlement discussions with Starboard with respect to Starboard’s pending proxy contest. However, they have been unable to reach an agreement. It added that it remains interested in a mutually acceptable resolution.

However, Starboard is far from pleased with the concessions offered by Darden. The fund said in May that it intends to replace all 12 members of the company’s board with its own preferred nominees at the annual meeting of shareholders in September. Starboard CEO Jeffery Smith noted that Darden CEO Clarence Otis’ departure “represents just one small step in the transformation that is urgently needed at Darden” and that the company “still requires a major overhaul at the board level.” He said that a majority change is required at the board level to hire a “transformational, operationally-focused” CEO, noting that the retirement of just two independent directors isn’t expected to “erase years of poor performance and oversight.” The fund said in a release that the nomination of nine directors was a “transparent tactic designed to manipulate and maintain the problematic status quo majority following the 2014 Annual Meeting.”

Starboard’s turnaround plan includes possible spin-off of specialty restaurant group

The fund said “In early September we will be publishing a comprehensive transformation plan for Darden. This plan involves company-wide operational improvements and a turnaround of Olive Garden, along with strategic initiatives including a value enhancing strategy for Darden’s real estate assets, a potential spin-off of the company’s Specialty Restaurant Group (SRG), and a value-enhancing franchising strategy.” However, Starboard wants a majority change at the board because it added that the “status quo Board and management represent a substantial risk, since we believe they are unable to produce the significant pre-tax and after tax cash flow advantages our plan will generate. Improving value, protecting and, hopefully, enhancing the dividend, and fortifying the investment grade rating, all require improved, strategy, execution, and cash flow generation.”

Starboard said that its plans for Darden will result in significant shareholder value creation, while also strengthening the “attractive $2.20 annual dividend” and investment grade rating. The fund added that it had lost confidence in the current board regarding the turnaround strategy for Darden’s Olive Garden brand because it believes they sold Red Lobster “because they didn’t know how to improve their own restaurants.”

Last year, Darden attracted activist interest because its shares were undervalue. It was lagging behind peers including Cheesecake Factory (CAKE), Texas Roadhouse (TXRH), Brinker International Inc. (EAT), and Bloomin’ Brands (BLMN). Darden is also a component of the iShares Select Dividend ETF (or DVY) and the Consumer Discretionary Select Sector SPDR Fund (or XLY).


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