Red Lobster is headed into a private equity turnaround. Darden Restaurants (DRI) said it would sell the seafood chain for $2.1 billion, jettisoning a dented brand that was beset by high costs and an early-bird special demographic—not the kind of casual diners who eat out often and spend heavily on cocktails.
Darden has spent the past six months trying either to sell or to spin off Red Lobster to shareholders after company executives concluded last year that the chain was a financial albatross dragging down its more successful Olive Garden, LongHorn Steakhouse, and Bahama Breeze restaurants. Red Lobster sales have been far more volatile than its corporate siblings. The seafood chain has higher food expenses than Darden’s flagship Olive Garden, which accounts for more than 40 percent of revenue.
Darden has been working furiously to revive sales at Olive Garden, which has more than 800 stores and made its name on all-you-can-eat salad and breadsticks served beside enormous plates of pasta-based dishes—most of them large enough to feed two diners. The company has been experimenting with new menu options and smaller portions, both of which could boost financial results. With the $1.6 billion it will clear by selling Red Lobster to Golden Gate Capital, Darden plans to pay off $1 billion in debt and use the rest to fund a share repurchase program of as much as $700 million.
Red Lobster isn’t alone in feeling the pinch of rising prices. Seafood sellers have been whacked over the past year by the surging cost of shrimp due to acute hepatopancreatic necrosis syndrome. Billions of young shrimp have died from the disease, which was first detected in farm-raised populations in Asia. Shrimp prices hit a 14-year high earlier this year. Adding insult to injury, Red Lobster was widely known for its $15.99 “Endless Shrimp” promotions designed to get people into the restaurant. The promo prompted the Huffington Post to offer a few repulsive tips on how to maximize one’s shrimp gluttony at the chain.
Beyond the expenses of procuring shrimp, Red Lobster also attracts an oversize share of older diners who don’t eat out frequently, while younger and spendier patrons eat their fish at more upscale restaurants—places that can cover rising costs better. Casual-dining chains like Red Lobster also have been hurt by the massive growth of such fast-casual options as Chipotle Mexican Grill (CMG) and Potbelly (PBPB).
Two activist funds, Starboard Value and Barington Capital Group, had pressed Darden to keep Red Lobster and monetize its real estate, and both expressed outrage over the proposed deal. In an e-mailed statement, Starboard CEO Jeffrey Smith said the sale “woefully undervalues Red Lobster and its real estate assets.” Barington’s chairman and CEO, James Mitarotonda, agreed that Darden’s transaction “amounts to a ‘fire sale’ price after shareholders clearly indicated that they did not want the company to enter into any transaction unless it was subject to their approval.” Golden Gate has already made plans to sell 500 Red Lobster locations for $1.5 billion and lease back the stores; the fund Gate also owns California Pizza Kitchen, Eddie Bauer Holdings, and the parent of Payless ShoeSource.