Major Proxy Advisors Back Entire Starboard Darden Slate

NEW YORK ( The Deal) -- In a blow to Darden Restaurants ( DRI) , the two main proxy advisory firms - Institutional Shareholder Services Inc. and Glass Lewis & Co. -- on Thursday recommended that shareholders vote for all 12 dissident nominees put up by activist fund Starboard Value LP for the embattled restaurant chain's board.

At issue is a proxy battle set for Oct. 10 that pits a slate of directors put up by Starboard chief Jeff Smith against a revised group of management-backed candidates that includes four seats for the dissident fund, four incumbents and four new nominees. Darden's board and Smith have been at odds over the future of the restaurant chain since Starboard first launched its campaign roughly a year ago.

ISS said in a report obtained by The Deal that Starboard's nominees represent an "embarrassment of riches" when it comes to experience on public company boards and significant restaurant operating experience "across a number of concepts" and in turnarounds. The proxy advisory firm also lauded the fact that Starboard said it would re-appoint two management-backed incumbent directors to an expanded 14 person board if all of their dissident candidates are elected. The proxy advisor said that provision addressed "continuity concerns."

Glass Lewis said the dissidents "has identified valid areas of concern, from a performance, operations and governance perspective, and outlined a realistic plan to improve the company's performance." In a report obtained by The Deal, Glass Lewis said Starboard has made a compelling case for its candidates as a result of the company's "long term loss of shareholder value and the board's governance practices and irresponsiveness to shareholders."

The proxy advisor recommendations come after Starboard on Sept. 3 rejected Darden's offer of four seats for the dissidents. With overwhelming support by the two main proxy advisory firms for the activists, it is possible Darden and Starboard may be in the middle of settlement negotiations. Officials from Starboard did not return calls and Darden issued a press release noting that Glass Lewis recognized that the restaurant company has made many improvements in operations, governance and leadership. It also defended its board nominees, arguing that its board should be "comprised of directors who represent the interests of ALL Darden shareholders, not just Starboard's interests."

Darden also has another activist to contend with, Barington Capital Group, which has a 2% stake and also believes that the entire incumbent board should be replaced with Starboard's nominees. Barington and Starboard's predecessor, Ramius Capital Group LLC, have teamed up on numerous campaigns over the years dating back to 2001, according to data compiled by FactSet SharkRepellent.

The dissidents have said they are disappointed with Darden's recent sale of its Red Lobster chain, a transaction the company completed over the investors' vociferous objections and one that the activists argued brought in far less than it was worth.

Another key point of contention between both Starboard and Barington and the company has to do with Darden's remaining real estate. Both dissidents said they believe that shareholder value can still be unlocked by monetizing the company's remaining restaurant real estate assets. With the Red Lobster chain sale completed, Darden still owns a number of restaurant chains, the largest of which is its casual dining chain Olive Garden. The activists said they believe value could be unlocked by divesting Darden's Olive Garden's real estate into a separately-traded real estate investment trust.

In a March presentation that was completed prior to the sale of Red Lobster and its substantial real estate portfolio, Starboard said Darden's real estate could be worth $4 billion and "possibly far more" and add between "$1 billion and $2 billion" of shareholder value. People familiar with Starboard note that the activist said the sale of Red Lobster's real estate confirms that the remaining mostly Olive Garden real estate is worth more than what they anticipated.

In its latest report, Starboard observed that after the Red Lobster sale, Darden owns both the land and buildings on nearly 600 stores and the buildings on another 670. The activist fund values the real estate at $2.5 billion to 3.0 billion and estimates that separating the real estate could create an additional $1 billion to $2 billion of shareholder value.

However, critics have raised concerns that selling the real estate could be a bad move for Darden in the long-term even as it adds cash to the balance sheet that can be used for dividends and stock buybacks that benefit the activists most in the short-term.

Lynne Collier, analyst at Sterne Agee in Dallas, argues that after the Red Lobster sale Darden no longer has a debt problem and does not need the cash from a real-estate sale. In addition, she argues, that in a recessionary environment Darden would want to own real estate as a buffer against difficult times. Another observer familiar with the situation contends that in a recession, Darden may have a more difficult time renegotiating bank loans if it doesn't have significant real estate assets as collateral.

"Darden doesn't have a severe debt problem" Collier said. "It was on the higher end of what we wanted to see but now given the Red Lobster sale they are not in a dangerous debt position."

She noted that from an analyst's perspective, it would be better to hike profitability at the store level than conduct any sale of real estate.

Darden notes that the cash it received from the Red Lobster sale allowed it to reduce debt and support its capital return initiatives, including a significant share repurchase and the ability to maintin the company's annual $2.20 a share dividend.

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