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In Wake of Red Lobster Sale, Starboard Seeks Control of Darden Board

NEW YORK (The Deal) -- Activist investor Starboard Value on Thursday said it would launch a full-scale proxy contest in an attempt to take over the 12-person board of Darden Restaurants (DRI - Get Report) after the company went ahead and made a deal to sell its Red Lobster chain to Golden Gate Capital for $2.1 billion.

Starboard said in a letter to shareholders obtained by The Deal that, despite the sale, it still had a plan to realize greater value from Darden's real estate.

The dissident has one big thing going in its favor if the proxy vote goes forward: in April, more than 57% of the company's outstanding shares were voted in favor of holding a special meeting to vote on Starboard's nonbinding proposal to have Darden consider delaying its planned Red Lobster sale.

But the company went ahead on May 16 with the Golden Gate deal, leaving Starboard with fewer options. Darden expects to close on the deal in the first quarter of its fiscal 2015 year ending Aug. 24, without a shareholder vote.

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It was likely that Darden had no plans to hold the special shareholder meeting until after it was too late to unwind the Red Lobster sale, according to people familiar with the situation. As a result, Starboard decided to change tactics and launch a proxy contest, which it had previously threatened it would do.

Starboard and another activist fund, Barington Capital Group LP had been pushing for Darden to consider strategic alternatives, such as the divestiture of all the company's real estate including that owned by Red Lobster into a separately traded REIT. Despite the deal with Golden Gate, Starboard said it believes it can unlock shareholder value by seeking to "monetize" the company's remaining restaurant real estate assets.

Besides the real estate, the activist fund, which owns a 6.2% stake, also wants to take over the board so it can initiate a number of "turnaround" initiatives such as cost reductions and a "radically improved guest experience."

Among the dissident slate are Charles Sonsteby, a former CFO of Chili's parent Brinker International and Bradley Blum, a former president of Olive Garden.

The proxy battle could take a long time as the company held its annual meeting last year in September and is not obliged to hold its earlier even though Starboard argued that it "cannot come soon enough."

However, people familiar with the situation contend that if Darden doesn't hold its meeting by October Starboard will consider filing a lawsuit to compel it to hold the meeting. The dissidents said they have reserved the right to change the composition of their board candidates.

Privately, according to people familiar with Starboard, the dissidents worry that Darden - which is incorporated in Florida - may try to increase the size of its incumbent board or make other changes as part of an effort to fend off the activists. They complain that the company has done everything they could to delay a vote on the Starboard nonbinding proposal so that they could consummate their Red Lobster sale first.

Starboard will also contend that the sale of Red Lobster's real estate assets to American Realty Capital Properties Inc. for $1.5 billion as part of a sale-lease back arrangement included in the deal indicates to the dissidents that all of Darden's remaining real estate has substantial value as a separately traded REIT and that buyers are willing to operate the restaurant business without the real estate.

Critics of the activists have argued in the past that Darden wouldn't be able to find an adequate buyer for Red Lobster without the real estate assets intact. Once the Red Lobster sale is completed, Darden will still own several restaurant chains, including Longhorn Steakhouse, Capital Grill and Olive Garden, which have their own substantial real estate assets.

The dissidents also argue that the substantial vote of investors seeking to have the company hold a meeting to weigh in on the Red Lobster sale before it is consummated indicates to them that they will have substantial support by proxy advisory firms and institutional investors for their activist slate of directors when the proxy contest takes place. Both proxy advisory firms, Institutional Shareholder Services Inc. and Glass Lewis, backed Starboard's efforts to hold a special shareholder meeting to consider their nonbinding proposal at Darden.

"Rather than pausing or even taking the steps required to hold the special meeting, Darden's current board ignored the special meeting request and instead appears to have accelerated the process to separate Red Lobster," Starboard said in the letter.

However, Darden said Thursday that Starboard's assertions are based on "incorrect and unrealistic analysis" and that the board and management team are "focused on creating value for shareholders. It added that the sale of Red Lobster and other changes at the company reflect the input the company has received from shareholders and from two separate financial advisors, Goldman Sachs & Co. and Morgan Stanley. Wachtell, Lipton, Rosen & Katz is serving as legal adviser to Darden's board while Olshan Frome Wolosky LLP are advising Starboard.

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