Says Deal Severely Undervalues Red Lobster, is Highly Tax-Inefficient and Does Not Retain Future Upside for Shareholders
James A. Mitarotonda, the Chairman and Chief Executive Officer of Barington Capital Group, L.P., which represents a group of shareholders of Darden Restaurants, Inc. (NYSE: DRI), today issued the following statement regarding Darden's recent announcement of the sale of its Red Lobster business:
"It is unconscionable that the Darden Board would allow the Company to sell its Red Lobster business for what amounts to a 'fire sale' price after shareholders clearly indicated that they did not want the Company to enter into a transaction unless it was subject to their approval. While the announced deal reinforces the value of Darden's vast real estate assets and the benefits of establishing separate brand-focused operating companies, as structured, we believe it destroys more value than it creates. Given the market's strongly negative reaction to the announcement, it appears that other shareholders are also extremely disappointed by the transaction.
The Company's announced valuation of the transaction at approximately 9x trailing twelve months EBITDA is grossly misleading as it includes the value of Red Lobster's real estate. After accounting for the $1.5 billion sale-leaseback, Golden Gate Capital is paying only approximately $600 million for Red Lobster's restaurant operations. Based on Red Lobster's pro forma EBITDA of approximately $115 million (net of ~$120 million of pro forma cash rent), it appears that Golden Gate is paying less than 5.5x pro forma EBITDA. In comparison, Darden's mature brand competitors, as stand-alone entities, trade at 9x to 10x EBITDA. The transaction also generates approximately $500 million of taxes and transaction costs that could be avoided if the Board proceeded with alternative restructuring opportunities that Barington and other shareholders have recommended.
The transaction values Red Lobster's real estate – which represents approximately 43% of Darden's fully owned restaurants and approximately 21% of the Company's ground leased restaurants – at approximately $1.5 billion. While the Red Lobster transaction confirms the significant value of the Company's real estate, it will unfortunately preclude the Company from entering into a variety of value maximizing transactions with respect to these assets with potentially lower tax and transaction costs, such as the creation of an independent real estate investment trust (REIT). It appears from Darden's press release that the Company failed to fully explore the option to sell or spin-off Red Lobster's operating business and retain Red Lobster's real estate, allowing the Company to collect rent from Red Lobster. This approach would have enabled the Board to create significantly more value for shareholders with significantly less tax leakage, while preserving the flexibility to further enhance shareholder value through the creation of a REIT in the future.
We also believe that shareholders would have been better off if Darden spun-off Red Lobster (along with the Company's other mature restaurant brands). This would provide the Red Lobster business with the focus and attention required to improve its long-term financial performance while preserving the upside of the business for existing shareholders instead of transferred it to a private equity buyer.
It is clear to us from the Board's decision to pursue this imprudent transaction and its horrific record in the area of corporate governance, that Darden's independent directors are neither focused on, nor responsive to, shareholder concerns. In over 14 years of investing, we have never seen a group of directors that have allowed a company to be run with such a blatant disregard for shareholder interests. We support Starboard Value's efforts to conduct a special meeting of shareholders in order to send a clear message of shareholder discontent regarding the Board and the Red Lobster transaction."
About Barington Capital Group, L.P.
Barington Capital Group, L.P. is an investment firm that, through its affiliates, manages a value- oriented, activist investment fund that was established by James A. Mitarotonda in January 2000. The Fund invests in undervalued publicly traded companies that Barington believes could appreciate significantly in value as a result of a change in corporate strategy or from various operational, financial or corporate governance improvements. Barington's investment team, senior advisors and industry contacts are seasoned operating specialists, experienced in working with companies to design and implement initiatives to improve their financial and share price performance. Barington is a frequent investor in branded consumer focused companies, with prior investments in companies such as Lone Star Steakhouse, Dillard's, Warnaco, The Jones Group, Pep Boys, Steven Madden and Nautica.
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