Red Lobster snapped up by Golden Gate

July 2014 | DEALFRONT | PRIVATE EQUITY & VENTURE CAPITAL

Financier Worldwide Magazine

Darden Restaurants Inc announced in May that it has agreed to sell its Red Lobster business and a number of other related assets to private equity firm Golden Gate Capital for $2.1bn in cash.

According to a company statement announcing the deal, Darden expects the sale of the Red Lobster business – unanimously approved by the company’s board – to close in the first financial quarter of 2015. However, completion of the deal is subject to customary closing conditions and regulatory approvals. Following completion of the deal Darden will receive $1.6bn in net cash immediately. The company will utilise approximately $1bn of that fund to pay down existing debt. Darden, based in Orlando, Florida, is expected to use the rest of the cash to help finance a new stock buyback program of up to $700m in 2015.

Once the sale of Red Lobster has been completed, Darden intends to focus its attention on the firm’s ‘core’ business, the Olive Garden restaurant franchise. Both Red Lobster and Olive Garden have been negatively affected in recent years by competition from lower cost rival restaurants such as Chipotle and Panera.

Sales at Red Lobster’s restaurants have been struggling for some time. In March, Darden noted that Red Lobster saw same store sales decline 8.8 percent and visits decline 11.9 percent compared to the same period a year earlier. Profits at the restaurant chain have also been negatively affected by the recent rise in shrimp prices. Shrimp stocks, particularly in South East Asia, have been hit by an incurable bacterial infection which has led to notable price hikes.

In light of the chain’s increasing financial difficulties Darden initially announced its plan to divest Red Lobster, which was founded in 1968, in December 2013. However, several activist shareholders, most notably hedge fund Starboard Value LP opposed the company’s decision to sell the business. The fund claimed that the move could potentially destroy as much as $800m worth of shareholder value. Accordingly Starboard Value, which owns around 5.5 percent of Darden’s outstanding shares, publicly warned the firm in May not to sell the chain before a special meeting was called by shareholders to discuss the potential sale. At the timing of writing, that meeting has yet to be scheduled. As a result Darden and a number of the firm’s other shareholders have expressed concern that the deal will close before the company’s investors can voice their concerns. “The announced sale woefully undervalues Red Lobster and its real estate assets,” said Starboard’s chief executive officer, Jeffrey Smith, in a statement.

Golden Gate’s acquisition of Red Lobster is not the firm’s first acquisition in the food service industry. In 2011 the company agreed to acquire California Pizza Kitchen in a deal worth around $470m. The firm also owns On the Border, a Mexican restaurant chain. Golden Gate has also recently acquired discount footwear retailer Payless ShoeSource and clothing chain store Eddie Bauer. Golden Gate has a total portfolio of assets worth around $12bn.

“Red Lobster is an exceptionally strong brand with an unparalleled market position in seafood casual dining,” said Josh Olshansky, managing director at Golden Gate Capital, in a statement announcing the deal. “Red Lobster is exactly the type of company in which we seek to invest given its great brand profile and strong management team. We see significant opportunities for future growth by partnering with Kim Lopdrup and the management team to support the long term success of Red Lobster.” As part of the deal, Golden Gate has made a separate $1.5bn deal to sell around 500 of Red Lobster’s 700 restaurants to American Realty Capital Properties, then lease the properties back to the firm.

Richard Summerfield