October 17, 2013 / 5:19 PM / 4 years ago

UPDATE 1-Barington Capital calls for Darden breakup, real estate spinoff

By Olivia Oran

Oct 17 (Reuters) - Darden Restaurants Inc, parent of the Olive Garden and Red Lobster chains, should break itself up and explore spinning off its real estate properties, activist investor Barington Capital Group said.

New York-based Barington, which is working with a group of investors that own more than 2 percent of the restaurant company, brought its ideas to Darden management, it said in a Sept. 23 letter posted on its website on Thursday.

Barington said it had met with members of Darden management in June.

Shares of Darden were up 0.7 percent at $51.01 in early- afternoon trading. The stock has fallen nearly 8 percent in the last 12 months as consumers have cut spending and amid competition from brands like Panera Bread Co and Chipotle Mexican Grill Inc.

The fund recommends that Darden split into two companies: One for its more mature Olive Garden and Red Lobster brands, and the other for its higher-growth chains including LongHorn Steakhouse, The Capital Grille, Yard House and Bahama Breeze.

Restaurant group Brinker International Inc used a similar strategy, divesting a number of brands over the last several years to focus on Maggiano’s Little Italy and Chili‘s.

Barington also said Darden’s land and buildings might be worth up to $4.4 billion if they were spun off into a publicly traded real estate investment trust, which would also reduce the company’s tax burden.

Darden could also explore selling its real estate properties, then leasing them back, the investor said.

Darden owns land and buildings for 1,048 restaurants, and buildings on 802 sites.

“We believe Darden must do more, and with a greater sense of urgency, to create value for shareholders,” Barington President James Mitarotonda said in the letter.

A Darden spokesman said in a statement the company would not comment on discussions with shareholders, but confirmed it had talked with Barington.

“The Board will take the time necessary to thoroughly evaluate Barington’s suggestions, just as the Company does for any of its shareholders,” he added.

In the first quarter ended Aug. 25, Darden’s net income fell 37 percent to $70.2 million, or 53 cents per share.

The company plans to cut $50 million in operating costs per year starting in fiscal 2015.

Analysts said change was needed at Darden but a breakup was not the answer.

“While we don’t believe a breakup makes the most sense (especially off such weak numbers), we do see other avenues for value creation,” Oppenheimer said in a research report. Darden could reduce capital expenditures to raise its stock price, the report said.

Peter Saleh, an analyst with Telsey Group, agreed that the company should reduce capital spending as a way to increase its valuation.

“We believe a separation or breakup of the company is unlikely and a more probable outcome is changing the company’s strategy to focus more on free cash flow generation and less on unit growth,” he said in a report.

Others said more significant change may be needed.

“Brinker and other brands have reduced the number of concepts they have and it’s very effective,” said Lynn Collier, an analyst with Sterne Agee. “Darden needs to do something very dramatic, I think.”

Darden is the latest activist target in the restaurant industry in the last several months. Others that have drawn attention from activist investors include Tim Hortons Inc , Bob Evans Farms Inc and Cracker Barrel Old Country Store Inc.

Barington successfully lobbied apparel group Jones Group Inc to sell noncore brands. The company is now involved in a sales process, sources have told Reuters.

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