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Darden's marching orders

Shareholder activism entered new ground Tuesday with the release by a Darden Restaurants shareholder of a polished, detailed plan for the company to be broken into three entities. It’s akin to a restaurant customer announcing he doesn’t like the layout of the place, then posting a blueprint of how it will look after the patron and some buddies complete the rebuild.

In an 83-page handout that would work perfectly as a dog-and-pony pitch, Barington Capital Group spells out what it insists should be done with Darden, an eight-chain, $8.6-billion-a-year company. It argues that the casual-dining giant should be restacked into businesses:

Darden-Mature, consisting of Red Lobster and Olive Garden, the concern’s workhorse but clearly greying brands;

--Darden-Higher-Growth, composed of younger, higher-volume concepts like Yard House, Seasons 52, Eddie V’s and Capital Grille;

--Darden Real Estate Investment Trust, a venture that Barington had not discussed earlier to any great degree. It would consist of Darden’s real estate holdings—the land and buildings on 1,048 of the company’s 2,138 restaurant sites, and the restaurants on 802 leased plots. Barington estimates the value of the real estate to be $4 billion, “which we believe is not reflected in the company’s current share price,” the presentation explains.

With the corporate restructuring, management would not be so overloaded and corporate in its thinking, Barington contends. It argues that Darden has “centralized too much of its restaurant brand management, creating internal complexity and diminished brand-level focus.”

Growth brands would get the capital and attention they need, including a reinvestment of cash flow, says Barington. The so-called Darden Higher-Growth entity would also have an easier time at portfolio management; executives could “evaluate potential brand divestitures and spinoff opportunities.”

Meanwhile, the long-beard brands, or what Barington calls the crown jewels of casual dining, could get the repolishing they need. Expansion would be halted until new strategies are hammered out, G&A costs could be reduced, and the Olive Garden and Red Lobster system could be pruned of under-performing and brand-tarnishing stores.

Woven throughout the presentation are references to what anyone exposed to Darden knows very well: It’s hardly the epitome of a lean, mean machine. The clear suggestion is that G&A expenses have run unchecked for too long.

Ditto for operating expenses. “Simply by lowering its advertising expense to be in-line with its peers, we believe Darden can reduce operating expenditures substantially,” Barington argues.

There are also a number of criticisms leveled at Darden CEO Clarence Otis. Barington notes that Darden tried to improve its responsiveness to changes in consumer preferences by adding management layers. The investor quotes Otis as acknowledging that promotional efforts aren’t working as they once did, and, in the CEO’s own words, “point to the need for bolder changes in the promotional approach at our three large brands.”

At one point, Otis is quoted about a pork chop.

If Barington convinces other shareholders to force a break-up of Darden, what would that mean to the company? Here’s my take:

  • Otis would likely be pushed out.
  • Gene Lee would almost certainly be named CEO of the Darden-Higher-Growth concern.
  • Red Lobster, Olive Garden and possibly LongHorn would shrink significantly.
  • The smaller chains that result would be left with dramatically smaller advertising budgets.
  • The creation of replacement concepts for Red Lobster and Olive Garden restaurants would become a real possibility.
  • Bahama Breeze and LongHorn could end up in another casual dining company’s portfolio.
  • Some brand-focused executives would try, successfully in some instances, to buy their charges and operate them as private companies.
  • Conglomerate-style companies like Ignite Restaurant Group, Bloomin’ Brands and Brinker International could feel pressure from the Street to restructure and streamline.
  • Other investors will be emboldened to speak out about more restaurant companies’ strategic directions.
  • Research companies would feel the cutbacks in the two post-Darden companies’ G&A and marketing spending.

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