CHICAGO - Shareholders aren’t happy with Darden Restaurants’ plan to sell or spin off Red Lobster, which doesn’t solve the biggest problem: finding more customers.
Shares of Darden, also the owner of Olive Garden and Long Horn Steakhouse, slid 3.5 percent last week after announcing it will separate the Red Lobster seafood chain. Raymond James Financial said a breakup won’t create much value for Darden, which is trading at a discount to most of its competitors, according to data compiled by Bloomberg. The plan also falls short of activist investor Barington Capital Group LP’s proposals for a bigger shakeup, including ways to profit from its real estate.
Darden shares rose $3.26, or 3.26 percent, to close Monday at $54.35, recovering most of last week’s drop. The shares have traded between $44.11 and $55.25 this year.
With Red Lobster’s same store sales declining, Darden instead should focus on luring diners to increase returns over the long haul, according to Albert Fried & Co. Some private-equity firms may see an opportunity to buy the chain and bring it back to health, Miller Tabak & Co. said. Acquirers in theU.S. restaurant industry typically pay about the equivalent of the target’s revenue, implying $2.6 billion for Red Lobster, data compiled by Bloomberg show. As a stand-alone company, though, it would trade at a discount to other chains, S&P Capital IQ said.
“The market is disappointed and saying, ‘OK, this is just a concession,’” said Sachin Shah, a special situations and merger arbitrage strategist at New York-based Albert Fried. “Step one really should be fixing the business. Right now, Darden needs to be aggressive in innovating and investing in the business and changing the mentality that Red Lobster is a mature, stagnant brand. That’s how you create long-term value.”
Rich Jeffers, a spokesman for Orlando, Fla.-based Darden, said the company is beginning work on a strategic plan for Red Lobster and picked Kim Lopdrup from its specialty restaurant group to lead the effort as chief executive officer of the chain.
Darden said the separation will allow Red Lobster’s marketing and operating strategies to be more tailored to the chain of 705 restaurants. Darden hasn’t yet decided whether it will sell Red Lobster or spin it off as a publicly traded company. It expects to close on any deal by the early part of fiscal 2015, which begins in late May.
While Darden is taking steps in the right direction, they’re not transformative and “could result in only modest changes in performance,” Sara Senatore, an analyst at Sanford C. Bernstein & Co., wrote in a Thursday report. “Specifically, the value of a Red Lobster remains an open question.”
Darden’s plans for Red Lobster may not be enough on their own, David Tarantino, an analyst at Robert W. Baird & Co., wrote in a Friday report. The key to creating value for shareholders rests with Darden’s ability to expand its operations, “and visibility to such improvement remains low.”
The restaurant operator is trailing some of its rivals amid competition for customers who are eating out less. Since the U.S. recession ended in June 2009, the Bloomberg Industries index of North American casual restaurants has climbed 164 percent, versus only a 55 percent gain at Darden.
Darden’s same-store sales fell in the past six months, and growth at Olive Garden - its largest chain, accounting for more than 40 percent of revenue - has slowed. While its smaller brands such as The Capital Grille and Eddie V’s are seeing a pickup in revenue at restaurants open for more than a year, Red Lobster’s same-store sales tumbled 4.6 percent in the quarter that ended in November after a 2.2 percent dip in the year that ended in May, according to data compiled by Bloomberg.
“This quarter was very bad” for Red Lobster, Bryan Elliott, an Atlanta-based analyst at Raymond James, said in a phone interview. “Its customer base is slowly dissipating.”
Shareholder Barington Capital, which has been pressing for changes at the $6.7 billion company, outlined its proposals last week before the restaurant operator announced its own plan. The New York-based hedge fund suggested splitting Darden in two because having more narrowly focused companies would lead to better operational performance. It would involve breaking apart Olive Garden and Red Lobster into one company and the smaller, faster-growing chains into another.
Barington, which owns more than 2 percent of Darden shares, also said that creating a publicly traded real-estate investment trust would unlock the value of the company’s properties, which it pegs at about $4 billion.
Darden’s plan “fails to address significant opportunities to enhance long-term shareholder value,” Barington Chief Executive Officer James Mitarotonda wrote in an email Thursday to Bloomberg News.
Business, Pages 23 on 12/24/2013