Why Starboard Value launches proxy fight at Darden

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Starboard Value and Darden

Darden Restaurants (DRI) continues to deal with activist fund Starboard Value, who has launched a proxy battle to take control of the restaurant company. The activist fund recently boosted its position in the restaurant giant, and currently owns an ~8.8% stake.

Orlando, Florida-based Darden is one of the largest full-service chain restaurants in the United States with above $8.7 billion in total annual sales. As of May 25, 2014, Darden operated 2,174 restaurants in the U.S., including brands such as Olive Garden, Red Lobster, LongHorn Steakhouse, The Capital Grille, Yard House, Seasons 52, Bahama Breeze, Eddie V’s Prime Seafood, four test “synergy restaurants” which house both a Red Lobster and Olive Garden restaurant in the same building, and three Wildfish Seafood Grille restaurants. In Canada, it operated 33 restaurants, including 27 Red Lobster and six Olive Garden restaurants.

Darden saw shareholder activism last year

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In December, 2013, Starboard disclosed a 5.6% interest in Darden through a 13D filing. According to a filing by Darden, Starboard acquired most of the  stake after the company’s December 19, 2013, announcement of its comprehensive strategic plan at an average share price of $50.66. In a January letter to Darden, Starboard said it believed that the market price of Darden significantly understated the value of the company’s businesses and real estate assets. It added that its operating margins were well below its peers including full-service casual restaurants like Cheesecake Factory (CAKE), Texas Roadhouse (TXRH), Brinker International Inc. (EAT), and Bloomin’ Brands (BLMN).

Starboard and another activist fund, Barington Capital, have opposed Darden’s $2.1 billion sale of its struggling seafood chain Red Lobster to investment firm Golden Gate Capital. The sale was completed last month. After Starboard’s requests for holding a special shareholders meeting to vote on Red Lobster’s sale were ignored by Darden’s board, the fund launched a campaign to take control of Darden. Starboard intends to replace all 12 members of the company’s board with its own preferred nominees at its annual shareholders meeting scheduled on September 30.

About Starboard Value

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Starboard Value LP is a New York-based investment adviser with a differentiated fundamental approach to investing in publicly traded U.S. small cap companies. Starboard said in a release that it invests in deeply undervalued small cap companies and actively engages with management teams and boards of directors to identify and execute on opportunities to unlock value for the benefit of all shareholders.

The activist fund’s previous targets include is a global packaging company MeadWestvaco (or MWV), furnishing and appliance supplier Aaron’s Inc. (or AAN), Office Depot Inc. (or ODP), Compuware (or CPWR), and Triquint Semiconductor Inc. (or TQNT). According to an investor presentation in March, Starboard cited 13D Monitor and said its “average return on a 13D filing was 28.9%—versus an average of 8.8% for the S&P 500 during the same time periods. But when it received a board seat, the average 13D return has been 34.3% versus 13.1% for the S&P 500.”

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