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UPDATE 3-Darden, under pressure, will spin off or sell Red Lobster

Lisa Baertlein and Aditi Shrivastava
Thursday, 19 Dec 2013 | 11:20 AM ET

Dec 19 (Reuters) - Darden Restaurants Inc said it would spin off or sell its struggling Red Lobster chain, bowing to pressure from hedge fund Barington Capital Group, and warned that earnings would fall more than expected this year due to weak demand.

Barington had been pushing for Darden to split into two companies - one that operates its mature Olive Garden and Red Lobster chains and another for its growing brands such as LongHorn Steakhouse and Seasons 52.

The hedge fund has also urged the company to explore creating a publicly traded real estate investment trust (REIT) to "unlock the value" of its property holdings.

Barington said those actions could push Darden's stock to between $71 and $80. The shares were down 6.3 percent to $49.58 in late-morning trading on the New York Stock Exchange.

Orlando-based Darden said it now expects fiscal 2014 earnings per share to fall 15 to 20 percent from 2013. Its previous forecast was a decline of 3 to 5 percent.

Asked on a conference call why the company was retaining Olive Garden, Darden Chief Executive Clarence Otis said the chain contributes strong cash flow and is a significant part of the company. Olive Garden has historically contributed about half of Darden's total revenue but of late has struggled to grow key sales at established restaurants.

Otis said Darden had reviewed the potential for a REIT and determined that substantial costs and other factors did not make it a viable option.

"That is not something that we think makes sense going forward. We think the plan that we've outlined is a plan that best creates shareholder value," he said.

New York-based Barington, which represents shareholders who own more than 2 percent of Darden, said in October the company had become too large and complex to compete with rivals such as Cheesecake Factory and Brinker International's Chili's Grill & Bar.

LATER, LOBSTER

Darden expects to close a tax-free spinoff of Red Lobster in early fiscal 2015 but said it also would consider a sale of the seafood chain.

A sale of Red Lobster could bring in $2.0 billion to $2.5 billion, Miller Tabak & Co analyst Stephen Anderson told Reuters.

Same-restaurant sales at Red Lobster declined a steeper-than-expected 4.5 percent in the second quarter that ended Nov. 24 and have fallen in four of the last five quarters.

"Red Lobster has almost (been) forgotten as a place to eat by U.S. families as they perceive the brand as not offering the most value per plate," said Brian Sozzi, chief executive of Belus Capital Advisors.

While Darden has attracted younger and higher-income diners to Olive Garden, LongHorn Steakhouse and its other chains, it has not replicated that success at Red Lobster.

"The spinoff will transform Darden into two independent public companies that can each focus on their different opportunities," Otis said.

Restaurant chains ranging from Darden direct rival Brinker to McDonald's Corp have used that same strategy in recent years to focus more intensely on their core operations.

Darden's announcement - which also outlined fewer new restaurant openings and other cost savings, a suspension of acquisitions, proposed changes to executive compensation and plans to revive Olive Garden - "was much bolder than we had expected," Anderson said.

Those changes are expected to save $60 million annually. Darden said it plans to used the freed-up cash to support dividends, share buybacks and to strengthen its credit profile.

Darden, the largest U.S. full-service restaurant operator with a market value of $6.9 billion, also said second-quarter net income fell 41 percent to $19.8 million, or 15 cents per share.

Goldman Sachs & Co is financial adviser to Darden, while Latham & Watkins will be its legal counsel. Wachtell, Lipton, Rosen & Katz is the legal adviser to Darden's board.

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