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The Deal: Activist Shareholder Calls for Darden Breakup

NEW YORK (The Deal) -- Given the track record for restaurants operating multiple chains over the long haul, Darden Restaurants (DRI - Get Report) should consider selling at least one of its brands, according to industry watchers.

The Orlando, Fla.-based operator of Red Lobster and Olive Garden has been under pressure from activist shareholder Barington Capital Group to break up the company.

Barington, a 2% shareholder, has called for Darden to separate its core Red Lobster and Olive Garden brands from its growth chains - including Yard House, Capital Grille, Seasons 52, Eddie V's, LongHorn Steakhouse and Bahama Breeze - into two public companies. The firm also wants Darden to spin off its real estate into a separate REIT.

Barington, on Thursday, hired a Houlihan Lokey and proxy advisory firm MacKenzie Partners to help review its proposal. The Houlihan team consists of Gregg Feinstein, Darren Novak, Gary Finger, Jake Foley and Geoff Sorbello, according to the firm.

A source familiar with the process expects the review to be completed by year's end. New York-based Barington released the letter it sent to Darden's board on Oct. 17.

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Industry sources remain unconvinced that splitting Darden into two companies is the best answer to increase shareholder value, but agreed that the company should consider selling at least one of its growth brands to a private equity firm such as Sun Capital Partners Inc.

One industry banker thinks Darden should spin off Yard House so that chain could reach its maximum growth and valuation potential. Darden acquired Yard House in July 2012 from TSG Consumers Partners LLC for $585 million. San Francisco-based TSG also considered taking Yard House public before it agreed to the sale.

Historically, restaurants have had a hard time focusing on multiple chains under the same corporate umbrella over a long term.

Oak Brook, Ill.-based McDonald's (MCD) was once a diversified restaurant operator, owning Chipotle Mexican Grill Inc. and Boston Market Corp. until it decided to hone its focus on making Big Macs. McDonald's spun off Chipotle in 2006 and sold Boston Market in 2007.

Likewise, McDonald's rival Wendy's (WEN) of Dublin, Ohio, mirrored McDonald's strategy when it spun off Tim Hortons Inc. and Baja Fresh Mexican Grill in 2006.

Brinker International Inc. of Dallas sold On the Border Mexican Grill & Cantina and Romano's Macaroni Grill, both to San Francisco's Golden Gate Capital, in 2008 and 2010, respectively, so it could focus on its Chili's and Maggiano's brands.

Louisville, Ky.-based KFC and Pizza Hut owner Yum! Brands (YUM) sold A&W All-American Food and Long John Silver's in 2011 to franchise groups.

One industry source wanted to see Yum! divest Taco Bell, while another analyst thought the company should divest its U.S. operations so it can focus on its China division.

Other activists have been going after restaurants this year. In September, Sandell Asset Management Corp. sent a letter to Bob Evans Farms Inc. calling for the New Albany, Ohio-based chain to separate its food packaging division from its core Bob Evans brand. Sandell also hired MacKenzie.

Earlier in November, Sardar Biglari lost his third attempt to gain seats on Cracker Barrel Old Country Store (CBRL) board, and the Lebanon, Tenn.-based chain also rejected Biglari's $20 per share dividend proposa

Darden shares were trading 1% higher, to $53.50 on Thursday, with its market capitalization near $7 billion.

Neither Darden or Barington returned calls on Thursday.

Written by Demitri Diakantonis

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