Hedge Fund Presses Case for Breakup of Darden Restaurants

Hiroko Masuike/The New York Times A hedge fund is calling for the breakup of Darden Restaurants, saying that its core Olive Garden and Red Lobster restaurants are suffering.

The activist hedge fund pushing for change at Darden Restaurants has made it official: It wants the conglomerate to break up into three companies and cut more costs.

In an 85-page presentation on Tuesday, the fund, the Barington Capital Group, provided its most in-depth explanation yet about why its multipronged plan would create the most value for the laggard restaurant operator.

It comes days before Darden is scheduled to release its latest quarterly earnings, in what one analyst said “will be the most important call of C.E.O. Clarence Otis’s career.”

The public presentation of Barington’s plan is yet another escalation of the firm’s campaign. While it describes itself as a low-key, constructive activist, and people briefed on matter have maintained that relations between the two sides remain cordial, the hedge fund has hired outside advisers. Among them is a proxy soliciting firm often used in board fights.

Barington’s plan was reviewed by its bankers at Houlihan Lokey. But its basic recommendations have remained consistent for several months. According to the hedge fund, Darden should divide its eight brands into two companies and focus on the differing needs of each group. One should contain its mature restaurants, Olive Garden and Red Lobster; the other should hold smaller, faster-growing franchises like Capital Grille and LongHorn Steakhouse.

The mature-brand company would focus on paying high dividends, while the other entity would focus on higher stock growth.

In its presentation, Barington offered its most detailed examination yet of Darden’s performance, arguing that the company’s shares had meaningfully lagged behind those of its peers. And its plan to capture economies of scale by buying more restaurant brands has failed, while customer counts at its core Olive Garden and Red Lobster restaurants have fallen amid a tougher time for traditional casual dining establishments, the fund said.

“We believe that Darden’s corporate centralization has gone from providing well-intentioned shared services to being a stifling burden on the chain level managers that is hindering the company’s ability to compete with its more focused and nimble competitors,” Barington wrote in its presentation.

The company should also spin off its real estate, which Barington estimates is worth at least $4 billion, into a publicly traded investment trust. Darden owns the land and buildings for about 1,048 of its restaurants and the buildings for an additional 802 leased sites. Spinning them off â€" or selling them and leasing them back â€" would better reflect their value, according to Barington.

And the company should double or triple the goal of its existing cost-cutting effort, aiming for $100 million to $150 million.

By Barington’s projection, its plan would lift Darden’s stock price from $46 a share before speculation about the hedge fund’s campaign emerged to as much as $71 to $80.

“We are pleased with the results of Houlihan Lokey’s independent analysis of our recommendations,” James A. Mitarotonda, Barington’s chief executive, said in a statement. “Their work not only confirms the opportunities we identified to improve long-term shareholder value at Darden, it also adds practical strategies to execute our recommendations and mitigate implementation costs.”