It came as no surprise that Darden Restaurants said “goodbye” to Red Lobster, North America’s largest seafood restaurant chain, on July 28. But what did surprise some observers was that on the same day the company announced that Chairman Clarence Otis had stepped down, and that Charles A. Ledsinger, Jr. immediately assumed the helm as an independent non-executive chairman.
Otis will remain on board as chief executive officer, however, until either December 31 or as soon as a replacement is found to fill that role.
This opens the door for activist investor group Starboard Value LP – which controls an estimated 8% of the company’s stock (NYSE: DRI) and has been disgruntled since plans were announced to divest Red Lobster last year rather than break the corporation up into three parts – to gain access to three of 12 seats on the board of directors.
Orlando, Florida-headquartered Darden sold Red Lobster and certain other assets and liabilities to San Francisco, California-based Golden Gate Capital, a private equity firm, for $2.1 billion in cash. The deal was described by the seller as “the culmination of a robust competitive process that enabled Darden to maximize the value of Red Lobster, eliminate the risks and volatility associated with continuing to own the business, and provide a realistic market-validated valuation of Darden’s real estate assets.”
The sale is also consistent with Darden’s strategy of focusing more sharply on the Olive Garden brand renaissance program and preserving its dividend, a company spokesman added.
As previously announced, approximately $1.0 billion of the net cash proceeds is expected to be used to retire outstanding debt. It is anticipated that the remaining net proceeds of approximately $500 million to $600 million will be deployed for a new share repurchase program of up to $700 million in fiscal 2015. In addition to strengthening Darden’s credit profile, with the lower debt levels and reduced outstanding share count, the company expects to maintain its current quarterly dividend of $0.55 per share, or $2.20 annually.
Outgoing Chairman Otis, who joined Darden in 1995 and was appointed ceo in 2004 and chairman in 2005, presided over the company as it evolved into the world’s largest full-service restaurant operator with a multi-brand portfolio that includes LongHorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V’s and Yard House, in addition to Olive Garden.
During his tenure, Darden grew to become the world’s largest full-service restaurant company with a strong multi-brand portfolio and an operating support platform that expanded from 1,381 restaurants with $5.2 billion in annual sales to more than 2,200 restaurants with over $8.7 billion in yearly sales.
However, the company’s two biggest casual dining operations, Red Lobster and Olive Garden, saw traffic counts slow down and check totals fall as recession-weary, price-conscious consumers opted to dine in less-expensive fast-casual chains during recent years. In Darden’s fiscal fourth quarter that ended in May, same-store sales at Olive Garden slipped 3.5% while same-store sales at Red Lobster declined 5.6%.
