ORLANDO/LOS ANGELES — Activist shareholder Starboard Value LP won its standoff with Darden Restaurants Inc , convincing shareholders to replace the entire board of the Olive Garden parent, a rare victory for dissident investors.
The election of Starboard’s 12-director slate, announced Friday at Darden’s annual meeting, was a feather in the cap for the New York hedge fund, Darden’s second-largest investor with an 8.8 percent stake.
It was a stinging defeat for Darden, which this year alienated investors by brushing off their vote requesting a special meeting to debate the company’s then-proposed sale of its struggling Red Lobster chain.
The “extraordinary” and “totally self-inflicted” loss for Darden comes as no surprise given Darden’s “tone deafness” to investor wishes regarding the Red Lobster sale, said Charles Elson, director of the Weinberg Center for Corporate Governance in Delaware.
“It was kind of a done deal, wasn’t it?” agreed Karl Sooder, a Darden investor and University of Central Florida marketing professor, who attended Darden’s annual meeting in Orlando.
The board sweep, which is based on a preliminary vote count, is notable because of Darden’s size, experts said. Darden is the largest U.S. operator of full-service restaurants with $8.55 billion in 2013 sales.
Some smaller U.S. companies have suffered similar fates recently.
For example, shareholders in ALCO Stores Inc in September replaced the full board at the retailer that serves small U.S. communities. Last year, investors replaced the whole board at Morgans Hotel Group Co.
Elsewhere, Starboard is agitating for change at Yahoo Inc and attempting to take RealD Inc private.
Shares in Darden closed down 1.8 percent at $48.37 on Friday.
“I feel great,” Starboard Chief Executive and newly elected Darden director Jeffrey Smith told Reuters on the sidelines of the annual meeting.
“Darden has all the right ingredients to regain the strength and prominence it once enjoyed,” Smith said in a joint statement with the company.
Starboard last month unveiled a nearly 300-slide proposal that included plans to sell Darden’s real estate, franchise its restaurants, spin off The Capital Grille, Yard House and other chains, and fix its flagship Olive Garden chain.
It also aims to fix Olive Garden’s pasta, which it described as poorly handled and generally overcooked.
“Shockingly, Olive Garden no longer salts the water it uses to boil the pasta, merely to get a longer warranty on its pots” said Starboard, which also plans to boost Olive Garden’s alcohol sales and dole out fewer of its popular unlimited breadsticks.
James Mitarotonda, CEO of fellow Darden activist Barington Capital Group, in June 2013 approached the company with ideas to improve results and kicked off what became a 16-month battle for the company’s future.
“We are extremely pleased that necessary changes have been made,” Mitaronda said in a statement.
CHANGES IN STORE AT OLIVE GARDEN
Changes are likely in store for Olive Garden with a new board of directors at the helm.
Activist investor Starboard Value on Friday succeeded in its push to replace all 12 seats on Darden Restaurants’ board with its own nominees. It’s not clear yet how Starboard will try to shake up the company right away. But last month, it issued a 294-page presentation detailing what it thought Darden’s management was doing wrong.
Here are some of Starboard’s criticisms that might give a clue on changes diners might see:
—SALTIER PASTA: Starboard took issue with Olive Garden for failing to salt its pasta water. “How does the largest Italian dining concept in the world not salt the water for pasta?” it asked. It cited a cookbook that said “… it’s simple: the water should be salty, Atlantic Ocean salty … “
—BREADSTICK CONTROL: Olive Garden’s famous unlimited breadstick policy also came under criticism. Starboard says servers need to be more disciplined in how many they bring out at a time. The hedge fund says the chain could reduce waste by bringing out one breadstick per guest, plus an extra for the table — in line with the official policy.
Starboard CEO Jeff Smith made clear on Friday that he didn’t want to stop people from asking for more, however. “I love Olive Garden’s unlimited breadsticks,” he said at the shareholder meeting.
—SIMPLER ITALIAN MENU: Menu items like burgers, Spanish tapas and fried foods like “Lasagna Fritta” were criticized for being inauthentic or unappealing. It also noted Olive Garden’s menu has mushroomed to 96 items. Darden executives have acknowledged the need to simplify.
—WINE WITH THAT? Alcohol should account for a higher percentage of sales, given how well it pairs with Italian food, according to Starboard. Alcohol only accounts for 8 percent of sales, which Starboard said is “unacceptable” and less than half that of some of its competitors.
THE ASSOCIATED PRESS