Red Lobter seafood restaurant. (Photo Credit: Red Lobster)

Darden to settle Red Lobster sale despite investors' opposition

Despite activist shareholders’ opposition, Darden Restaurants, Inc. has recently announced a definitive agreement to divest Red Lobster to private equity firm, Golden Gate Capital, for USD 2.1 billion in cash.

According to Zacks Equity Research, the sale of the business, whose transaction value after taxes and transaction costs will come down to roughly USD 1.6 billion, is expected to be completed in the fiscal first quarter of 2015.

Darden’s plan to sell Red Lobster has not gone down well with its investors: Hedge fund Starboard Value LP and Barington Capital Group LP, which issued a statement calling Darden’s plans “unconscionable,” and arguing the “fire-sale price” destroys more value than it creates, Nation Restaurant’s News informed.

Both investors have long pushed for Darden to sell off the Red Lobster operations along with sister chain Olive Garden, but to hold on to the restaurant real estate, which would have allowed it to collect rent.

James Mitarotonda, Barington’s chair and chief executive, called the announced valuation of the transaction “grossly misleading” because it includes the value of Red Lobster’s real estate.

According to Mitarotonda, American Realty Capital Properties will buy the restaurant real estate for USD 1.5 billion and lease the properties back, which means Golden Gate is paying only about USD 600 million for Red Lobster’s restaurant operations. That would amount to less than 5.5 times the chain’s pro forma EBITDA of about USD 115 million, considering the estimated USD 120 million Red Lobster would be paying in rent.

Nevertheless, the firm insists that the sale will help Darden focus on its more profitable brands like LongHorn Steakhouse and Capital Grille. The restaurateur will now be able to concentrate more on growing these profitable concepts rather than two lesser profitable behemoths.

Clarence Otis, Darden’s chair and chief executive, said in a statement that the company has had extensive conversations with shareholders about the casual-dining group’s strategic direction

Company Officials told The New York Times that holding off on the sale agreement until after the proposed shareholder vote could have prompted Golden Gate to walk away.

“It was clearly communicated during this process, by all bidders, that uncertainty was unacceptable,” Otis stated.

Red Lobster, which opened in 1968, helped popularize seafood among Americans and today has about 700 locations in the US and Canada. 

News sources informed that the company has tried to attract a wider array of customers by adding more non-seafood dishes to Red Lobster's menu but the efforts didn't take hold.

Red Lobster, whose compared sales in restaurants fell in five of the last six quarters, contributed about 31 per cent of total revenues of Darden in 2013, according to Reuters.

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