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Could the battle between Darden Restaurants and its activist shareholders end up with the big casual dining operator owned by a consortium of private equity groups?
We have no information that this will happen. But it’s definitely feasible.
Darden is a big company. Its market cap is about $6.4 billion. A buyout would cost the acquirer a premium on that. At 20 percent, that would make Darden worth $7.7 billion. At 33 percent, that would be about $8.5 billion. The total value would be even higher, given that Darden has about $2.7 billion in total debt.
Either number would make Darden, by far, the costliest restaurant buyout in history, easily besting the $4.2 billion acquisition of Burger King by 3G Capital. Even if Darden succeeds in getting rid of Red Lobster before selling, it would still be the biggest restaurant acquisition.
The restaurant consultant John Gordon, in fact, believes that Darden could be pushing hard its Red Lobster divestiture largely to make itself prettier to a potential private equity buyer. By selling or spinning off Red Lobster, Darden could get rid of a good portion of its debt while improving margins and shrinking the company size to make it an easier pill for a buyer to swallow. And the buyer wouldn’t have to worry about fixing Red Lobster.
To see why Darden could be a buyout candidate, just look at the recommendations from the activist shareholders pushing major changes at the Orlando-based company. Many of the issues that Starboard Value and Barington Capital are pushing are the same types of issues that lure private equity buyers.
For one thing, there is the real estate. Right now, a huge portion of Darden’s value is locked up in real estate–which Starboard estimates to be worth about $4 billion, meaning nearly two-thirds of Darden’s market cap is real estate based. Even without Red Lobster, the company has substantial real estate holdings that would likely be monetized once a new buyer comes in.
Another issue is the number of brands that Darden operates, eight overall. One brand, Yard House, could be spun off in an IPO–remember, that chain had been considered a candidate for the public markets before Darden scooped it up for a high multiple.
Ultimately, the rest of that brands could be broken apart in some form, too. One of the issues Darden has in separating its flagship, Olive Garden, from the rest of the company is a belief that its high-growth Specialty Restaurant Group couldn’t survive on its own without a lot of debt. Even then, however, a private equity buyer could wait until that group was more able to stand on its own.
Darden has other financial levers that would make it attractive to a buyer. Its high SG&A spending, for one thing. In addition, though Darden has started franchising its flagship brands internationally, that remains an untapped market that could well lure a buyer into paying a higher price for the company. One of the reasons 3G Capital bought Burger King was its belief that the chain could grow substantially in foreign markets.
As I said, all of this is pure speculation on my part. But there are plenty of private equity groups with the wherewithal to make a run at a company like Darden. Bain Capital, which had been involved with three of the largest restaurant buyouts in history including Domino’s, Dunkin’ Brands and the previous Burger King buyout, just raised $7.3 billion for a buyout fund. That’s nearly enough to buy Darden.