Barington Capital Group, L.P., which
represents a group of shareholders of Darden Restaurants, Inc. DRI,
today announced that it has sent the following letter to the independent
directors of the Company:
March 26, 2014
Michael W. Barnes
Leonard L. Berry
Christopher J. Fraleigh
Victoria D. Harker
David H. Hughes
Charles A. Ledsinger, Jr.
William M. Lewis, Jr.
Senator Connie Mack, III
Michael D. Rose
Maria A. Sastre
William S. Simon
c/o Darden Restaurants, Inc.
1000 Darden Center Drive
Orlando, Florida 32837
To the Independent Directors of Darden Restaurants, Inc.:
As you know, Barington Capital Group, L.P. represents a group of shareholders
of Darden Restaurants, Inc. ("Darden" or the "Company") who believes that the
Company's common stock is significantly undervalued and would be worth
substantially more if Clarence Otis, the Company's Chairman and Chief
Executive Officer, were a more effective steward of Darden's eight brands and
extensive real estate holdings. While we are patient, long-term investors, we
are deeply concerned by the rapidly deteriorating financial performance of
Darden under the leadership of Mr. Otis. In addition, we are dismayed by his
efforts to separate Red Lobster and its valuable real estate from the Company
without shareholder approval, notwithstanding the fact that this controversial
transaction could potentially diminish shareholder value and appears to us to
be self-serving.
In light of the foregoing, we have lost confidence in Mr. Otis's ability to
run Darden in the best interest of shareholders. As the independent directors
of Darden, you are responsible for selecting and overseeing management and
ensuring that shareholder interests are protected. We are therefore writing
to express the urgent need for you to pause and carefully reassess the
situation at this critical time.
We encourage you to follow the advice of Roel Campos, a former Commissioner of
the Securities and Exchange Commission, given in his August 2006 speech
entitled "How to be an Effective Board Member." In his speech, Mr. Campos
emphasizes that independent directors must be more involved in evaluating
corporate decisions and should have an open mind when confronted by
shareholders. He suggests that boards challenge management to explore
shareholder concerns and recommendations before adopting a "friend or foe"
status. Mr. Campos also recommends that directors not settle for what is
merely acceptable, but should strive for what best benefits a company's
shareholders as a whole. He states that directors who don't should be taken
to task for their lackluster conduct.
In addition to heeding the advice of Mr. Campos, we also call upon you to take
the following actions:
1. Appoint an Independent Chairman. Given the existence of potential
conflicts of interest and the heightened need to ensure that shareholder
concerns are being protected, we believe that Mr. Otis should no longer serve
as Chairman of the Board. We recommend that a new independent chairman be
immediately appointed in order to ensure that Board decisions are unbiased and
made in the best interests of the owners of the Company.
2. Directly Engage in a Meaningful Dialogue with Shareholders. We recommend
that the independent directors engage in meaningful dialogue with shareholders
to more fully explore all alternatives to improve long-term shareholder
value. Under the circumstances, we believe it is extremely important that the
independent directors communicate directly with shareholders in order to
receive a fair and unbiased understanding of their views and recommendations
that have not been filtered through senior management.
3. Permit Shareholders to Vote on the Red Lobster Separation Plan. We
fervently believe that the Darden Board should obtain the approval of
shareholders before proceeding with the controversial separation of Red
Lobster. Darden has sought to give the impression that shareholders are
widely supportive of management's plan by repeatedly stating, with carefully
chosen words, that its plan reflects "input" from shareholders.[1]
Unfortunately, one only has to look at the stock market's reaction to the
announcement of the Red Lobster separation on December 19^th to confirm
investors' disappointment with the plan.
As shareholders of Darden, we appreciate and strongly support Starboard
Value's efforts to provide the owners of the Company with the right to express
their views on the Red Lobster separation. However, we do not understand why
you, as the representatives of shareholders on the Darden Board, are requiring
Starboard to go through the tedious process of bringing a consent solicitation
to call a special meeting in the first place. In light of the concerns that
have been raised regarding this transaction, we believe that you should cause
the Board to promptly announce that it will provide shareholders with the
right to vote on the Red Lobster separation – an announcement that we believe
the Board should have made in December. Providing shareholders with the right
to vote on the Red Lobster separation is not only good corporate governance,
it will help minimize the time and resources that the Company and its
shareholders will have to spend to achieve the same outcome through a consent
solicitation. If Mr. Otis is so confident that shareholders support his plan,
he should welcome the opportunity to have his views on such an important
transaction validated by shareholders.
4. Reconsider the Current Restructuring Plan and Explore Opportunities to
Unlock the Value of the Company's Real Estate Assets. We strongly recommend
that the Company reconsider its views regarding Red Lobster's real estate, as
we believe that Darden should retain these valuable assets rather than include
them as part of any sale or spin-off. Retaining Red Lobster's real estate
would preserve the opportunity to pursue a variety of other opportunities to
unlock the value of these assets in the future, including through the
formation of a publicly traded real estate investment trust (REIT). It would
also allow the Company to collect rent from Red Lobster, which we believe is a
superior alternative to including the real estate in the separation. J.P.
Morgan analyst John Ivankoe expresses a similar view in his March 4, 2014
analyst report, which estimates that $120 million in rental income per year
could be generated for the Company and its shareholders by renting the real
estate to Red Lobster.[2]
We encourage you to independently explore more comprehensive restructuring
alternatives that include the separation of Olive Garden and the formation of
a publicly traded REIT.[3] We also recommend that you permit the Company's
financial advisors to engage in discussions with private and public real
estate investment companies. We are confident that there are a number of
interested parties that would welcome the opportunity to engage in a
constructive dialogue regarding a variety of value-creating real estate
solutions available to Darden.
5. Ensure that Shareholders Receive Full and Fair Disclosure. As independent
directors, we believe that it is imperative that you ensure that shareholders
are provided with full and fair disclosure from the Company's senior
management team. We are appalled by recent press reports detailing Darden's
heavy-handed treatment of financial analysts critical of the Company. Acts of
"retribution" have allegedly included preventing such analysts from asking
questions on earnings conference calls and refusing to give such analysts and
their clients access to management or invitations to Company-sponsored
conferences.[4] We also disapprove of the recent decision by Darden to cancel
the Company's 2014 Analyst and Investor Conference and replace it with
private, "invitation-only" meetings with analysts, which appears to us to
represent an attempt by management to control and obfuscate the flow of
information concerning its restructuring plan. This type of behavior is
unacceptable to us and, in our opinion, is not indicative of a management team
that can be relied upon to run a public company in the best interests of
shareholders.
6. Improve the Company's Corporate Governance. It is our belief that the
Board needs to improve Darden's corporate governance and do a better job of
aligning management and shareholder interests. This is not only evident to us
from the restructuring plan that the Board approved, but from the Company's
horrific corporate governance rating that was recently issued by Institutional
Shareholder Services.[5] We were also shocked to learn that just days after
the Company issued its disappointing financial results for the third quarter,
the Board voted to update Darden's Bylaws to help protect their jobs by making
it more burdensome for shareholders to nominate new directors. One would
expect that that if the Board was truly shareholder focused, it would find it
unnecessary to increase Darden's defenses, particularly at a time when it is
implementing a restructuring plan that Mr. Otis claims will enhance
shareholder value.
7. Consider Beginning a Search for a New Chief Executive Officer. Under Mr.
Otis's leadership, the Company has underperformed virtually every financial
benchmark over the past one, two, three, four and five-year periods.
Shareholders have been given little reason to believe that that this will
change any time soon if Mr. Otis remains Chairman and Chief Executive
Officer. As you know, on Friday the Company announced same-store-sales
declines of -5.4% at Olive Garden and -8.8% at Red Lobster for the third
quarter of fiscal 2014. This comes on top of same-store-sales declines of
-4.1% at Olive Garden and -6.6% at Red Lobster for the third quarter of fiscal
2013. In fact, same-store-sales have declined at Olive Garden – Darden's
largest brand accounting for approximately 42% of the Company's revenue – in
six out of the last eight quarters, and at Red Lobster – Darden's second
largest brand accounting for approximately 30% of the Company's revenue – in
seven out of the last eight quarters.
As the financial performance of Darden continues to decline, we believe that
Mr. Otis is not only failing to pursue opportunities to create strong
independent operating companies and unlock the value of Darden's significant
real estate holdings, he is proceeding with a restructuring plan that could
potentially destroy the opportunity to fully unlock this value in the future.
We are puzzled by Mr. Otis's continued resistance to more broadly implementing
the proven strategies we have recommended that have improved long-term
shareholder value at a number of other restaurant companies. Given the
extensive list of benefits that Darden has stated Red Lobster will achieve
from a separation, one would expect that a CEO truly focused on doing what is
best for shareholders would want the same for Darden's seven other brands.
It is our belief that the rationale Mr. Otis has given to defend his decision
not to separate Darden's remaining brands is spurious. During Darden's March
3^rd conference call, Morgan Stanley analyst John Glass asked why a spin off
creates value for Red Lobster, but not for the Specialty Restaurant Group. In
response, Mr. Otis stated:
"From a strategic perspective, we believe that all of our casual dining
brands, with the exception of Red Lobster, really have a great deal in common
as they move forward in terms of the things they need to do to protect their
core. So strategically there's a lot of comparability there that is not at
Red Lobster … And our Specialty Restaurant Group is comprised mostly of casual
dining brands that have a lot in common with LongHorn and Olive Garden."
We believe that Mr. Otis is being disingenuous, given the significant and
obvious differences that exist between brands such as The Capital Grille and
Olive Garden. These brands have vastly different target customers, average
check sizes and alcohol sales, as well as significantly different needs in
terms of marketing, menu innovation, food sourcing and supply chain
requirements (just to name a few).
Clearly, keeping Darden's seven remaining brands together is beneficial to Mr.
Otis for a variety of reasons. Among other things, it allows him to continue
to run Darden in the same fashion as before, with the further benefit that his
poorest performing brand would be removed from the portfolio. We also
recognize that including the real estate in a sale benefits Mr. Otis in that
it will obscure the value that is received for the brand alone, which has
significantly declined under his stewardship.
It therefore appears to us that Mr. Otis's views regarding the Red Lobster
separation support the adage "where you stand [on an issue] depends on where
you sit." Mr. Otis, who led Darden in the acquisition of five brands over the
past six years or so, sits in an office in Darden's spectacular, $152 million
corporate headquarters located on a 57-acre campus in Orlando. This facility
was designed and built under Mr. Otis's leadership to run the multi-brand
portfolio he assembled in a centralized fashion. Given that Mr. Otis's
background in finance and investment banking leaves him more qualified to run
a restaurant conglomerate than an individual restaurant brand, some have
questioned whether his views may be more influenced by his personal desire to
maintain his position, pay and perquisites than a concern for what is
ultimately in the best interest of shareholders.[6]
We have long questioned why the Board did not select a person with stronger
operating experience in the restaurant industry to run Darden. While we have
patiently tried to work with Mr. Otis, it is clear to us that the Company has
not been able to effectively compete with Darden's better managed peers under
his leadership. We therefore think it is time to for the Board to consider
whether it should begin to look for a new CEO – someone with exceptional
operating and management skills in the restaurant industry, who has the
background and experience to run Darden no matter how it may be restructured
in the future.
* * * * *
In closing, we believe that there is clearly a need for greater leadership at
Darden by its independent directors, and we encourage you to be significantly
more proactive. As stated by Mr. Campos:
"Directors must ask the tough questions and get involved. And most
importantly, when something that should raise an eyebrow comes to the
attention of a director, that director must follow up and investigate. The
director cannot ignore red flags, or even pink ones. In fulfilling the role
of an effective director, an individual must take a proactive approach, going
beyond the minimum legal obligations…. Frankly, to be an effective board
member, directors who are supposed to be independent must have the wherewithal
to be an active presence on management's radar and to act independently in the
interest of the shareholder. Passivity is not an option."
Needless to say, the status quo at Darden is unacceptable. Nevertheless, we
remain convinced that Darden can significantly improve its long-term financial
performance if the right strategic and operating decisions are implemented by
a well-qualified management team. We are therefore looking to you, as the
independent directors of Darden, to take decisive action at this critical time
for the Company – it is your responsibility to ensure that the right
management team is in place and that it is focused on making decisions that
are in the best interests of shareholders.
Sincerely yours,
/s/ James A. Mitarotonda
James A. Mitarotonda
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