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Starboard Weighs in on Red Lobster's Darden

Tickers in this article: DRI
NEW YORK ( The Deal ) -- While activists have called for Darden Restaurants to spin off its Red Lobster chain, Jeffrey Smith's Starboard Value LP actually wants the restaurant conglomerate to hold off, at least for now.

New York-based Starboard, which owns a 5.5% stake in Darden, sent a letter to Darden CEO Clarence Otis on Tuesday, indicating that Darden should hold off on spinning off Red Lobster so it can explore a full range of strategic alternatives.

"We believe the company should more fully evaluate all available operational, financial, and strategic alternatives for Darden in order to create and execute on a comprehensive plan to address all aspects of the business and to ensure the best possible outcome for all shareholders," Smith wrote in his letter.

Starboard is calling for Darden to spin off its real estate, franchise company-owned stores and reduce costs.

Orlando, Fla.-based Darden said on Dec. 19 that it will look to either sell or spin off Red Lobster and hired Goldman, Sachs & Co. to help look at its options. Industry sources said they believe Red Lobster can fetch less than $2 billion in a sale.

However, New York hedge fund Barington Capital Group LP, a 2% Darden shareholder, has been demanding that Darden spin off Olive Garden as well as Red Lobster and also wants the company to spin off its real estate assets into a separate REIT. Barington said it believes that Darden's real estate is worth around $4 billion.

Barington and Starboard have accused Darden's management of doing just the bare minimum to increase shareholder value.

"It appears to us that the proposed plan is a hurried, reactive attempt, in the face of shareholder pressure, to do the bare minimum to appease shareholders and distract from the company's underlying problems, rather than the result of an informed and comprehensive review of all available opportunities to create shareholder value," Smith wrote.

Starboard said it believes that if Red Lobster was spun off into a public company, it would be trading lower than its industry peers, including Darden.

Meanwhile, Barington has scheduled a webcast for Jan. 30, when it will explain why it is still disappointed with Darden's proposed changes. The firm has been pressuring Darden to spin off Red Lobster and Olive Garden from its growth chains, including Yard House, Capital Grille, LongHorn Steakhouse, Seasons 52, Eddie V's and Bahama Breeze.

"Given the negative reaction to the announcement of the proposed Red Lobster separation, shareholders are also clearly dissatisfied with the current proposal," Smith wrote.

Darden shares were trading eight cents lower, to $50.88 on Tuesday afternoon, giving it a market capitalization of $6.6 billion.

On Friday, Starboard nominated three director candidates to Wausau Paper Corp.'s nine-person board, arguing that the company is still deeply undervalued, should cut corporate overhead, repurchase $100 million in stock, issue a regular $1 per share dividend and "execute" on opportunities to drive improvements and attract shareholders.