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May 16, 2014

Darden to sell Red Lobster for $2.1 billion

NEW YORK — Darden Restaurants has agreed to sell the Red Lobster seafood-restaurant chain to Golden Gate Capital for $2.1 billion, giving it an injection of cash and time to focus on reviving growth in its Olive Garden business.

The sale will result in about $1.6 billion in proceeds, of which about $1 billion will be used to retire debt, Orlando, Florida-based Darden said Friday in a statement. The remainder will fund a share buyback program of as much as $700 million.

The move caps a quest to free Darden of the underperforming Red Lobster seafood restaurants that Chief Executive Officer Clarence Otis announced in December. While the plan is drawing opposition from activist investors who say it destroys value, Otis says it will help the company focus on turning around the Olive Garden chain, its largest revenue generator.

"This certainly appears to be a fairly priced transaction for the company, satisfying its needs of getting rid of Red Lobster, taking the distraction away in that regard," Robert Derrington, an analyst at Wunderlich Securities, said in an interview. "They should be able to focus on improving the business, but the industry is very challenged."

Red Lobster's same-store sales, a key measure of a chain's strength that excludes revenue from new restaurants, have declined in seven of the past eight quarters. The brand also had limited growth potential because many of its customers are elderly and don't go out to socialize often.

At the same time, the broader casual-dining industry has been struggling with still-shaky consumer confidence and inroads from fast-food restaurants. Last year, sales at full-service restaurants rose just 2.8 percent, compared with a 3.5 percent gain for fast-food places and other limited-service eateries, according to Chicago-based research firm Technomic Inc.

That trend has taken a toll on Olive Garden, an 800-store chain known for large portions of basic Italian food. The brand recently introduced a hamburger and smaller, tapas-style plates of food to attract younger diners. The chain's chefs are currently trying to latch on to newer trends in food and experimenting with ingredients such as polenta, capers and olives.

Golden Gate, a private-equity firm based in San Francisco, manages more than $12 billion in assets and has made restaurant and retail investments in companies including California Pizza Kitchen, Eddie Bauer and Zale, which in February agreed to be sold to Signet Jewelers for $1.4 billion. Golden Gate was founded in 2000 by dealmakers from private-equity firm Bain Capital.

Golden Gate already has agreed to sell about 500 Red Lobster locations to American Realty Capital Properties Inc. for about $1.5 billion and then lease back the spaces, according to a separate statement Friday.

New York-based hedge funds Barington Capital Group and Starboard Value had pressed Darden to consider keeping Red Lobster and separating its real estate holdings, which Starboard said may be worth $4 billion. The investors last month gathered support for a special meeting to give shareholders a chance to vote against Otis' plan. Barington also has pushed for Otis to step down, saying the stock has underperformed since he became CEO in 2004.

Starboard CEO Jeffrey Smith panned the sale Friday, saying that it "woefully undervalues Red Lobster and its real estate assets" and ignores the will of the shareholders who had voted for the special meeting.

"This sale is the wrong transaction, at the wrong time, for the wrong reasons," Smith said in an emailed statement. "This board's value destructive and self-serving actions fly in the face of corporate democracy."

Edward Rose, a spokesman for Barington Capital, didn't immediately respond to messages requesting comment.

 

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