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Restaurant Finance Watch: Starboard's Jeff Smith upends activist investor game

Restaurant Finance Watch: Starboard's Jeff Smith upends activist investor game

NRN editor and restaurant finance expert Jonathan Maze breaks down what you should be watching in the industry this week. Connect with him on the latest finance trends and news at @jonathanmaze and [email protected]. RELATED: • Analysts cautious on new Darden board's plans • Darden board ousted • More restaurant finance news

It’s difficult to overestimate the significance of Starboard Value L.P.’s victory in its proxy fight against Darden Restaurants Inc.

In October, Darden shareholders voted to approve all 12 nominees from Starboard over a slate from the company. The shutout has sent ripples through corporate America.

According to Fortune, Starboard CEO Jeff Smith is the first activist to take over a Fortune 500 company, something better-known and more flamboyant activists like Bill Ackman and Carl Icahn haven’t done. Fortune called Smith “the most feared man in corporate America.”

Smith has received considerable credit for the way Starboard ran the Darden proxy. Starboard nominated highly respected directors and got considerable attention for its 294-page plan for changes at the company. But many observers questioned Darden’s strategy in dealing with the activists, particularly opting to sell Red Lobster for $2.1 billion to Golden Gate Capital in May after 57 percent of shareholders voted for a special meeting to discuss the spinoff.

Ignoring that vote and selling Red Lobster was “a stick in the eye for shareholders,” University of California, Berkeley law professor Steven Davidoff Solomon wrote in the New York Times, even before the proxy vote.

By placing handpicked members in each of Darden’s 12 seats and being named chairman, Smith has raised the stakes of every activist proxy fight. Now, instead of merely ceding board seats to activists, boards risk losing full control of the company in these activist fights. It’s entirely likely that Smith’s win will embolden activist investors even more.

According to Fortune and Hedge Fund Research, the amount of money in activist hedge funds has jumped from $36 billion at the end of 2009 to $112 billion today. CNBC called it “the golden age of activism.”

Activism has played a major role in the restaurant industry at chains including Cracker Barrel, Famous Dave’s, Ruby Tuesday, BJ’s Restaurants, Bob Evans, Red Robin, Denny’s and Popeyes, among others.

Activists are pushing ideas, gaining board seats and forcing major cost cuts. Bob Evans, which recently lost four seats to activist investor Sandell Asset Management, said it would sell its corporate aircraft, and has hired advisers to analyze its structure and potential cost cuts.

Public stock investors are more willing to listen to the views of activists because they generally improve stocks. From 2009 through 2013, stocks of companies targeted by activists gained 48 percent on average, according to Bloomberg. That beat the S&P 500 by 17 points. All of the chains mentioned above are at or near all-time or 52-week highs.

There is already some evidence that Starboard’s win is emboldening other activists. Investors have nominated a full slate at activist investor Sardar Biglari’s Biglari Holdings Inc., for instance. And just this week activist JCP Investment Partners nominated six people to the nine-person board at Emeryville, Calif.-based Jamba Inc.

To be sure, some activists do end up running the companies they target. The most infamous example of this in the restaurant industry is Biglari, who used a 2008 proxy fight to take board seats at Steak ’n Shake. He was soon appointed chairman and renamed the San Antonio-based company after himself, turning it into a multi-company investment vehicle.

Starboard took this a step further by openly running 12 board members against Darden nominees. The board is now looking for a new CEO, and they all will likely agree with Starboard’s proposed changes at Darden, including a sale of real estate, a split of the company into multiple entities and, potentially, franchising one or more of the seven brands in its portfolio.

But companies don’t have to put activists on boards to succeed in proxy fights. At Cracker Barrel, Biglari ignited a proxy against the family-dining operator in 2011. The company resisted his efforts, but it also adopted many of his proposals and named Sandra Cochran CEO. Cracker Barrel has won each proxy fight against Biglari in the years since, and its stock has nearly tripled in value.

Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze

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