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Orlando-based restaurateur Darden Restaurants Inc. (DRI - Analyst Report) is facing trouble regarding the spin-off of one of its restaurant concepts, Red Lobster. A major shareholder of Darden, Starboard Value LP, believes the spin-off is not in the best interest of the shareholders.

In Oct 2013, hedge fund, Barington Capital Group LP, acquired 2.8% stake in Darden. Soon after the acquisition, Barington Capital proposed a break-up of the company amid growing concerns about Darden's performance. In Dec 2013, under pressure of Barington Capital Darden announced a comprehensive plan to separate (through spin-off or sale) its core brand, Red Lobster, in order to enhance shareholder value and leverage the benefits of the company's position.

Starboard Value LP filed a Preliminary Solicitation Statement with the Securities and Exchange Commission to arrange a special meeting for Darden shareholders to express their views on the Red Lobster divesture. However, this is being viewed as an effort by Starboard Value to suspend the spin-off.

However, Starboard Value, which own 5.5% stake in Darden believes the latter should seek shareholders’ opinions regarding the spin-off.

The investment consultant in a public letter to Darden Shareholders stated that it is worried that the company will complete the spin-off before the 2014 Annual Meeting without taking suggestion from shareholders. Starboard Value believes the separation will not help Darden to recover its business and improve cost structure. The spin-off will, however, significantly hurt Darden’s shareholder value.

However, Starboard Value will need to get the support from nearly 50% shareholders to conduct the Special Meeting.

This is not the first time that the Zacks Rank #4 (Sell) company has witnessed difficulty regarding the Red Lobster separation. Last month, Darden was criticized by Barrington Capital for not processing the spin off effectively.

Sales at Red Lobster remained under pressure for most of fiscal 2013 and in the first half of fiscal 2014. The weak top line performance compelled the company to take the decision to separate the segment. Another brand, Olive Garden, also underperformed for the major part of fiscal 2013. However, it was up 2.4% year over year during fiscal first-quarter 2014 driven by a set of initiatives to boost the brand.

Other Stocks to Consider

Some better-ranked stocks in the restaurant industry include Fiesta Restaurant Group, Inc. (FRGI - Snapshot Report), Brinker International, Inc. (EAT - Analyst Report) and Buffalo Wild Wings Inc. (BWLD - Analyst Report). While Fiesta Restaurant sports a Zacks Rank #1 (Strong Buy), Brinker and Buffalo Wild Wings have a Zacks Rank #2 (Buy).

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