Darden to Sell Red Lobster for $2.1B

 

Darden Restaurants says it will sell its Red Lobster chain to investment firm Golden Gate Capital in a $2.1 billion cash deal.

The company, which also owns Olive Garden, had announced late last year that it planned to either spin off or sell Red Lobster to improve its financial performance.

Both Olive Garden and Red Lobster have been losing customers in recent years, even as the company changed the menus and marketing campaigns to win back business. Part of the problem is the growing popularity of chains like Chipotle and Panera, where customers feel they can get the same quality of food without having to pay as much or wait for table service.

Red Lobster, which opened in 1968, helped popularize seafood among Americans and today has about 700 locations in the U.S. and Canada. The first restaurant in Lakeland, Florida, boasted a menu including a half a dozen oysters for 65 cents and platters with frog legs and hush puppies for $2.50.

As the chain suffered sales declines more recently, Darden executives blamed a variety of factors, including a refusal among customers to swallow price hikes. In 2012, for instance, executives cited a $1 price hike for its "Festival of Shrimp" special in explaining a quarterly decline in sales.

More recently, the company tried expanding Red Lobster's menu to include more non-seafood dishes in a bid to attract a wider array of customers. The efforts didn't take hold.

Darden CEO Clarence Otis noted that Red Lobster has been unable to capture higher-income customers.

The company sees more potential in fixing Olive Garden, which has about 830 locations. Executives say it's a better fit with Darden's other chains that cater to diners willing to spend more, such as Longhorn Steakhouse and Capital Grille.

Darden recently reworked the logo for Olive Garden and has been adding lighter menu items, as well as smaller dishes that it says reflect eating trends.

Still, affordability is an ongoing issue across the industry and Darden has been slow to address the issue. At the height of the downturn, for instance, Applebee's introduced a "2 for $20" deal that proved so popular it ended up becoming a menu fixture.

Investors have challenged Darden's plans to sell only Red Lobster, saying that the company should separate Olive Garden and Red Lobster as a pair from its more successful chains.

After the transaction costs, Darden said it expects proceeds of $1.6 billion, of which $1 billion will be used to retire outstanding debt. The company said it expects the deal to close in its first fiscal quarter of 2015.

Golden Gate Capital made a $1.5 billion deal to sell the Red Lobster real estate to American Realty Capital Properties, then lease it back. Its other investments include California Pizza Kitchen, Payless ShoeSource and Eddie Bauer.

Shares of Darden, based in Orlando, Florida, fell nearly 4 percent to $48.70 in premarket trading.

We may love or hate eating at a Red Lobster, but there is no other seafood chain in the world that has increased seafood consumption than the Red Lobster chain...virtually every restaurant unit in the chain is showing a profit...primarily due to their hurdle performance standard that virtually does not allow them to keep open an unprofitable unit...I personally witnessed a unit in the Ft Lauderdale area being closed within six months of opening, simply because it did not meet the hurdle standard...they closed that unit and opened another one in the same general area with somewhat slightly better demographics...to the best of my knowledge, the second unit remains open to this day...

Another not so well known fact...Red Lobster owns and operates, very profitably, the single largest seafood purveyor in the world...yep, that's right, largest in the world...I believe it is still called Pinellas Seafood, but perhaps it has changed over the years...Pinellas Seafood buys more seafood annually than most third world countries combined...a simpy incredible operation...when they go into fishing villages around the world, they will commit to the fishermen to purchase virtually everything caught...fish, shrimp, scallops, all of it...they then take what is menu seafood for the Red Lobster chain and re-sell the remainder, at profitable prices...with the huge increase in seafood consumption around the world, this represents a solid cash flow entity for the company...

Due to the supply of seafood from Pinellas Seafood, virtually every Red Lobster unit always has the consistent menu items...this is why when you order any particular shrimp menu item, the shrimp will always be the same size and color; courtesy of Pinellas Seafood...again, while there is little arguement that you can find better seafood restaurants, you simply cannot find any restaurants that always have the consistency of Red Lobster...and, while I personally prefer other private seafood restaurants, there is simply little room to argue that overall, the Red Lobster chain provides a significantly huge seafood eating population with very consistent seafood meals...

The ultimate problem for Red Lobster has been one of declining profit margins on their sales...the primary market that Red Lobster serves has not been willing to abosrb the higher prices, and the more affluent customers simply prefer the private and more culinary seafood restaurants...personally, I also do not believe it possible to serve their standard market and the affluent market within the same restaurant units...as a result, Red Lobster is suffering from their own long history of success to a particular market...however, they still drive considerable revenues and profits, albeit not necessarily with the annual increases that investors demand...

As a side note, I really don't see the Company making any great gains after the Red Lobster sale...let's face it, an Olive Garden is also not the Italian restaurant of the affluent either...and, Longhorn for steaks...???...not in my world...ownership of Red Lobster may actually be the equivalent of "widows and orphans" stocks of old...solid continuing cash flows and profits, but not likely to increase in value or profits over the long run...in the end, the chain's future may be limited by the old problem of market over-saturation...we shall see...