Following a decision last month by Darden Restaurants Inc., not to sell its owned real estate and instead pursue its plan to spin-off its Red Lobster division, a major investor which owns 5.5% of the outstanding common stock of the company, took issue with the decisions.
Starboard Value LP issued a detailed presentation outlining the substantial value it believes is intrinsic to Darden’s real estate and a number of what it said were highly attractive alternatives for Darden’s real estate assets.
Starboard also refuted statements regarding debt breakage costs made by Darden's management.
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Starboard Value LP is a New York-based investment adviser and claims that Darden Restaurants has the largest real estate portfolio in the casual dining industry, owning both the land and buildings for more than 1,000 stores and the buildings on another 850.
Starboard estimates Darden’s real estate is worth approximately $4 billion, and that separating the real estate from its restaurant operations could create an additional $1 billion to $2 billion of shareholder value. Starboard also claims that a real estate separation can be structured with minimal debt breakage costs.
By operating Darden as an operating company or as a REIT, the firm could maintain investment grade ratings, Starboard claims.
Last month, Darden’s board determined that full real estate separation via the formation of a REIT would introduce significant operational complexity, remove from Darden an important strategic asset, and likely not create meaningful shareholder value, the company said.
A REIT spin-off would be a transaction that entails significant tax complexity and uncertainty that could result in meaningful additional fixed costs and contingent liabilities, Darden's board determined.
And separating the company’s real estate via a series of sale-leaseback transactions would be an expensive form of secured-debt financing relative to other options available to Darden, its board determined.
Such transactions could also result in potentially meaningful tax leakage and would raise many of the same issues related to the formation of a REIT, including the necessity of refinancing all of Darden’s outstanding debt, the company said.
Meanwhile, Starboard called Darden's plan to spin-off Red Lobster the wrong chain at the wrong time, and for the wrong reasons.
In December 2013, Darden approved plans to separate the company’s Red Lobster business, reduce the number of new stores it opens, lower capital expenditures and forgo acquisitions in a bid to address changing industry dynamics in the competitive casual dining sector.
The restaurant operator planned to slow the number of new stores it opened primarily by suspending new unit growth at Olive Garden and reduce the number of new LongHorn Steakhouses it opens this year.
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