#4 Discussion with Barington Capital: James Mitarotonda, Gus Vlak and Starboard Value take on Darden (Olive Garden Restaurants)

How a few Activists Uncovered a Billion-Dollar Opportunity

Below you’ll find the Darden podcast episode featuring Barington Capital, investor letters to management, as well as hundreds of pages of slides outlining strategic initiatives for Darden

What happens when a municipal bonds banker becomes the CEO of one of the largest restaurant conglomerates in the US? First, endless breadsticks, then a cheeseburger at Olive Garden; and ultimately a fire sale of prime real estate assets and the legendary Red Lobster chain. Listen to the full episode above to hear the full story of what happened with Darden Restaurants, the iconic parent company of Olive Garden and Red Lobster.

Jim Mitarotonda and Gus Vlak, of Barington Capital saw the writing on the wall and intervened to prevent the conglomerate from diving into corporate quicksand. After Barington spent weeks doing due diligence on the company, a weekend article in Barron’s exposed the opportunity of buying Darden’s depressed stock by quoting an article by Howard Penney’s Hedgeye research, and the margin of safety due to the wealth of real estate at Darden. However, the only ones brave enough to act were Jim and Gus, of Barington Capital, and Jeff Smith of Starboard Value. Through relentless communication with management and shareholders, a solid investment rationale and decisive action, they not only saved Darden from its poor earnings doom loop, but also launched a dramatic turnaround that reshaped the company’s future for long term shareholders.

In our conversation, Jim shared many anecdotes that highlight the common sense of Barington’s strategic recommendations. For example, Barington warned Darden if they were to sell Red Lobster, at least hold on to the real estate. Unfortunately, the board at Darden was obstinate, and refused to listen, or even hold a shareholder vote on the matter.

Common sense isn’t so common…

Interestingly, Jim shared with us, that when on the board of Pep Boys, the company once considered buying a St. Louis chain of service stations owned by a mechanic. This mechanic, with no formal financial background, had split his real estate holdings from his operations—a move that made his business more disciplined and real estate more valuable. However, the irony was that Darden, with many MBA’s and bankers on the management team, could not follow the same common sense that small business owners have.

How did Barington first spot the investment opportunity?

Their journey started in a surprising place: a headline in The Wall Street Journal. Darden had missed earnings yet again, and its stock had tumbled by 15%. The news caught Jim’s eye during a routine morning meeting at Barrington Capital. He and Gus began digging deeper, uncovering glaring operational inefficiencies and a treasure trove of untapped real estate value.

Then, something unexpected happened. Before they went public with their findings, Barron's published an article echoing much of their research. Gus vividly recalled feeling like their insights had been scooped. “All our work is in Barron’s,” he thought. But to their surprise, the market barely reacted. The opportunity was still there—waiting for someone bold enough to act.

This moment draws an uncanny parallel to an investing legend, Charlie Munger, who once said: “I read Barron’s for 50 years. In 50 years, I found one investment opportunity… I made about $80 million with almost no risk.” Like Munger, Jim and Gus saw gold where others saw noise—and they turned that insight into one of the most successful activist campaigns in history.

Darden Restaurants is a titan of casual dining. If you’ve ever dug into a plate of endless breadsticks at Olive Garden or indulged in the Cheddar Bay Biscuits at Red Lobster, you’ve experienced a slice of Darden’s legacy. Today, the company operates nearly 2,000 restaurants under brands like LongHorn Steakhouse, The Capital Grille, and Yard House. But before it became the household name it is now, Darden started small—with a 25-seat diner in Georgia.

From a Green Frog to a Giant

In 1938, Bill Darden opened a humble luncheonette in Waycross, Georgia, called “The Green Frog.” His motto, “service with a hop,” embodied the hospitality-first mindset that would define his restaurant empire. Fast forward to 1968, and Darden co-founded Red Lobster, the first chain of its kind, focused on mid-priced seafood dining. The idea was a hit. Within just a few years, Red Lobster had expanded across Florida and beyond, bringing in millions in annual sales.

The company grew rapidly under the corporate umbrella of General Mills, which invested heavily in its expansion and also launched Olive Garden in 1982. By the mid-1990s, Darden was spun off as its own publicly traded entity, and the company seemed unstoppable. It became the second-largest publicly traded restaurant company in the U.S., second only to McDonald’s.

What Went Wrong?

By the 2000s, cracks began to appear. While Olive Garden and Red Lobster were still the flagship brands, they had lost much of their original charm. Both chains were struggling with stagnant growth and operational inefficiencies. Meanwhile, Darden’s attempts to diversify into new concepts—like the Caribbean-themed Bahama Breeze and Smokey Bones BBQ—failed to gain traction.

The turning point came when Clarence Otis, a former municipal bonds banker, took over as CEO in 2004. While Otis had financial expertise, he lacked operational experience in the restaurant industry—a fact that would become painfully obvious. Under his leadership, Darden made a series of missteps. The company became bloated, with eight brands operating under a highly centralized and inefficient management structure. Even worse, Otis oversaw the disastrous decision to sell Red Lobster along with its valuable real estate, effectively throwing away billions in shareholder value.

As Jim Mitarotonda put it, “They promoted [Otis] after Smokey Bones failed… He ran it into the ground, but somehow that was considered enough experience to take over the whole company.”

Access Primary Source: Barington Capital’s early letters to Darden outlining strategic initiatives for creating shareholder value

A Company Ripe for Change

By 2013, Darden was in dire straits. Its stock price had stagnated, operational costs were soaring, and the company seemed rudderless. For Jim and Gus, the opportunity was obvious: Darden was undervalued, and with the right changes, it could return to its former glory. What followed was a high-stakes activist campaign that would pit two determined investors against an entrenched management team.

The Thesis: Streamline Operations and Unlock Real Estate Value

1. Separate the Business into Two Focused Companies
   Barington argued that Darden’s centralized management and bloated structure were holding the company back. Their proposal was to split Darden into two distinct entities:

   • A “Mature Brands” division for Olive Garden and Red Lobster to stabilize performance and focus on cash flow generation.

   • A “Growth Brands” division for smaller, faster-growing brands like LongHorn Steakhouse, Yard House, and Seasons 52 to target innovation and expansion.

   This would allow each division to operate with clear goals and more focused leadership.

2. Unlock the Hidden Value in Real Estate
   Darden’s vast portfolio of owned and ground-leased properties, estimated at a pre-tax value of $4 billion, represented a significant untapped opportunity. Barington believed monetizing this real estate—via a REIT spin-off, sale-leaseback, or other methods—could deliver substantial shareholder value.

3. Cut Bloated Operating Costs
   With SG&A expenses far exceeding those of its peers, Barington projected Darden could save $100–$150 million annually by realigning costs and decentralizing brand management.

Real Estate Valuation Methods

To assess the value of Darden’s real estate, Barington applied three standard valuation approaches:

1. Public REIT Multiples

   • Using triple-net lease REIT comparables, they conservatively estimated a value range of $3.8–$4.1 billion.

2. Income Approach (Rent Capitalization)

   • By calculating potential rental income and applying capitalization rates, they arrived at a pre-tax valuation of $3.8–$4.4 billion and a post-tax valuation of $3.4–$4.0 billion.

3. Comparable Transactions

   • Analyzing recent restaurant real estate sales yielded a valuation range of $3.3–$4.1 billion, depending on tax adjustments.

Access Primary Source: Barington Capital Darden Deck

Early Pushback from Analysts

When Barington first presented these ideas to analysts, the reaction was not what they expected. Many dismissed their valuations as overly optimistic and saw the REIT idea as impractical. As Gus Vlak put it, “The analysts told us, ‘This doesn’t pencil out. The math doesn’t work, and you’re wasting your time.’”

This skepticism made it even harder to build early momentum. Private equity firms were more receptive, recognizing the potential in Darden’s real estate, but even they questioned whether the operational and financial complexities of a spin-off could be overcome. Barington had to double down, refining their analysis and gathering more data to prove their thesis.

How Starboard Got Involved

In late 2013, Starboard began quietly acquiring shares of Darden. By early 2014, they owned approximately 5.6% of Darden’s outstanding shares, making them a significant stakeholder alongside Barington. Starboard's strategy focused on leveraging their reputation and expertise in shareholder activism to amplify pressure on Darden’s management.

Early letter to Darden CEO Clarence Otis from Starboard Value

Starboard letter to Darden/Shareholders in response to the Red Lobster sale announcement

Barington’s letter to Darden’s board about implementing strategic initiatives

Their entry into the campaign wasn’t just opportunistic—it was strategic. Starboard believed that Barington’s thesis about Darden’s inefficiencies and real estate value was sound, but they took the analysis even further. They began issuing their own public letters outlining detailed criticisms of Darden’s management and highlighting opportunities for improvement.

Access Primary Source: Starboard Value’s 300 pg Darden deck Proposing a new strategy

The Decision to Sell Red Lobster

One of the most contentious moments in this saga came in May 2014, when Darden’s management, led by CEO Clarence Otis, announced the sale of Red Lobster to Golden Gate Capital for $2.1 billion. To activists like Jim Mitarotonda and Jeff Smith, this move was a catastrophic mistake. Red Lobster wasn’t just a brand—it represented a significant portion of Darden’s valuable real estate portfolio.

Starboard immediately went on the offensive, publicly condemning the sale. They argued that selling Red Lobster as a single package, including its real estate, significantly undervalued the assets. In Starboard’s view, this was like “selling the goose that laid the golden egg.”

Access Primary Source: Starboard’s Angry letter to Darden regarding the sale of Red Lobster

Jim Mitarotonda was equally vocal in his criticism. In a media interview, he described the sale as a “fire sale,” saying, “They didn’t just sell Red Lobster—they gave away the real estate too, which could’ve been monetized separately for far greater value. It’s a textbook case of destroying shareholder wealth.”

Access Primary Source: Darden’s Letter to shareholders about selling Red Lobster and response to Starboard Value

The Special Meeting Controversy

As frustration with Darden’s management grew, both Barington and Starboard pushed for a shareholder vote to hold a special meeting. The goal was to give shareholders an opportunity to weigh in on major strategic decisions, including the proposed sale of Red Lobster. Activists secured overwhelming support, with 57% of shareholders voting in favor of the meeting.

But management refused to heed the results. Instead of listening to their shareholders, Darden’s board moved forward with the sale of Red Lobster, ignoring mounting criticism from both activists and analysts. This decision not only alienated shareholders but also strengthened the activists’ case that the current leadership was unfit to run the company.

Starboard’s Response

With management unwilling to compromise, Starboard escalated the fight. They released an extensive 300-page presentation detailing their plan to overhaul Darden, including the value they believed was left on the table in the Red Lobster sale. They argued that the company’s real estate could have been spun off into a REIT, which would have unlocked billions in value while keeping Red Lobster as part of Darden’s portfolio.

Starboard’s detailed analysis won the backing of many institutional investors, who had grown increasingly skeptical of Darden’s leadership. By this point, the activists weren’t just calling for operational changes—they were demanding an overhaul of Darden’s entire board of directors.

The Fallout from Red Lobster

The sale of Red Lobster proved to be a tipping point. Institutional investors, angered by management’s disregard for shareholder input, began rallying behind the activists. Starboard and Barington used this momentum to push for a proxy vote to replace Darden’s board with a slate of directors aligned with their vision.

This set the stage for the climactic proxy battle, where Starboard and Barington would fight to take control of Darden and implement the changes they had been advocating for all along.

Starboard’s Vision: The Key Proposals

Starboard’s campaign wasn’t just about removing management—it was about saving Darden from itself. In their exhaustive 300-page deck, Starboard outlined specific recommendations to fix the company’s operational inefficiencies, restore brand identity, and unlock billions in hidden value. Here are some of the highlights:

1. Split the Company

   • Similar to Barington’s earlier proposal, Starboard advocated dividing Darden into two companies:

     • A Mature Brands division for Olive Garden and LongHorn Steakhouse, focused on stabilizing performance and generating cash flow.

     • A Growth Brands division for smaller, high-potential brands like Yard House, Seasons 52, and Bahama Breeze, with a strategy centered on expansion.

2. Real Estate Monetization

   • Starboard strongly criticized Darden’s decision to sell Red Lobster and its real estate as a package. Instead, they proposed creating a Real Estate Investment Trust (REIT) or pursuing selective sale-leaseback transactions to unlock as much as $4 billion in value.

3. Operational Overhaul at Olive Garden

   • Olive Garden, Darden’s largest brand, became a focal point in Starboard’s critique. Among their suggestions:

     • Reinvent the menu to better align with customer expectations.

     • Streamline kitchen operations, including reducing food waste and improving efficiency.

     • Improve marketing to focus on the brand’s Italian roots and core value proposition.

   Starboard even famously criticized Olive Garden’s practice of serving unlimited breadsticks, claiming it led to waste and diluted the dining experience. This became a media sensation and a rallying cry for reform.

4. Cut Corporate Bloat

   • Starboard proposed reducing corporate overhead and SG&A (selling, general, and administrative) costs, which were significantly higher than industry peers. They argued for empowering brand-level management to reduce inefficiencies.

5. Brand-Specific Turnarounds

   • For each of Darden’s brands, Starboard laid out detailed strategies, including menu updates, location optimizations, and marketing refreshes to restore customer loyalty and drive growth.

Some highlights from public letters from Activists and Management

Starboard’s Criticism of Management

• Jeff Smith (Starboard Value), in one of their letters, criticized the Red Lobster sale:
  “The decision to sell Red Lobster, including its valuable real estate, was a poorly executed fire sale that destroyed significant shareholder value.”

• On the company’s broader inefficiencies, Starboard wrote:
  “The sale of Red Lobster underscores the urgency to address the persistent mismanagement, lack of accountability, and flawed strategic decisions that have plagued Darden under its current leadership.”

• In another letter, Starboard added:
  “We believe that the opportunities to create shareholder value at Darden are extraordinary, but they cannot be realized without significant change to the company’s board and management.”

Management’s Defense

• Clarence Otis (CEO, Darden) responded:
  “Darden’s management team and board have acted in the best interests of the company and its shareholders. The sale of Red Lobster was a strategic decision to simplify operations and focus resources on the brands with the most growth potential.”

• On Starboard’s proposals:
  “Starboard’s plans rely on unproven assumptions and fail to consider the operational complexities of our business and the realities of the competitive dining landscape.”

Starboard’s Rebuttal

• Jeff Smith fired back in a scathing response:
  “Complexity is not an excuse for failure. If management had truly been acting in the best interest of shareholders, they would not have ignored the special meeting vote, nor would they have rushed to sell Red Lobster for a fraction of its value.”

• On the missed opportunity with real estate, Starboard stated:
  “Darden owns significantly more real estate than its peers, yet it has done nothing to unlock this value for shareholders. Instead, it has used these assets to subsidize inefficient operations and poor decision-making.”

The Special Meeting Controversy

One of the most contentious points was the special meeting called by shareholders to address Darden’s strategic direction. Starboard and Barington gathered 57% of shareholder votes in favor of the meeting—a clear majority. Despite this, Darden’s board refused to hold the meeting, arguing that it was unnecessary given their existing plans. Starboard blasted this decision in a letter:

• Starboard Value:
  “By ignoring the voices of 57% of your shareholders, you have made it abundantly clear that this board prioritizes its own agenda over the interests of the company’s true owners.”

The Aftermath of Red Lobster

Jim Mitarotonda’s reaction to the Red Lobster sale highlighted the activists’ frustration:

• Jim Mitarotonda (Barington Capital):
  “The decision to bundle Red Lobster with its real estate was a strategic blunder of historic proportions. Management effectively gave away billions in shareholder value by failing to consider alternative approaches, such as a REIT spin-off or sale-leaseback transaction.”

Timeline of the Proxy Battle

1. Early 2014: Starboard Enters the Fight

   • Starboard Value begins acquiring Darden shares, eventually disclosing a 5.6% stake in the company. They publicly align with Barington’s criticisms and release detailed letters highlighting mismanagement and underperformance, with special emphasis on the Red Lobster sale and unrealized real estate value.

2. May 2014: Red Lobster Sale Sparks Outrage

   • Darden’s management announces the sale of Red Lobster to Golden Gate Capital for $2.1 billion, including its real estate portfolio. Starboard and Barington immediately criticize the move as a “fire sale” that drastically undervalued the assets.

   • Starboard organizes shareholder support to call for a special meeting. 57% of shareholders vote in favor, but Darden’s board refuses to act.

3. July 2014: Starboard Releases Its 300-Page Plan

   • Starboard publishes an exhaustive presentation outlining a roadmap to unlock Darden’s value. The plan proposes spinning off real estate into a REIT, revitalizing Olive Garden, and decentralizing management. Starboard’s plan is widely praised by institutional investors.

4. September 2014: The Proxy Vote

   • Starboard secures the support of major shareholders, including T. Rowe Price, BlackRock, and others, who are dissatisfied with Darden’s management.

   • At the annual meeting, shareholders overwhelmingly vote to replace the entire 12-member board with Starboard’s slate of directors. This marks one of the most complete activist victories in history.

5. October 2014: A New Era Begins

   • Starboard’s new board appoints Gene Lee, a respected Darden insider, as interim CEO. He later becomes CEO permanently and leads the company’s turnaround efforts.

Timeline of the Real Estate REIT Spin-Off

After the proxy battle, Starboard prioritized unlocking Darden’s real estate value. While the activists initially explored a full REIT spin-off, they ultimately opted for a more targeted strategy:

1. 2015: Initial Exploration

   • Under Starboard’s guidance, Darden conducts an in-depth review of its real estate portfolio. Starboard and the board consider various options, including sale-leasebacks and a REIT spin-off.

2. 2016: Four Corners Property Trust (REIT) is Created

   • In November 2015, Darden announces the creation of Four Corners Property Trust (FCPT), a publicly traded REIT. The spin-off involves 418 of Darden’s properties, primarily from Olive Garden and LongHorn Steakhouse.

   • The spin-off allowed for Darden to pay off over $1b in debt

3. Post-Spin-Off: Shareholder Benefits

   • FCPT begins trading independently, providing shareholders with direct exposure to the real estate component of the company, and the option to sell it at a fair valuation.

Access Primary Source: Announcement of Four Corners Property Trust Spinoff

Crunching the numbers—how did the investment fare financially?

First, we’ll start with reported profits - in a Journal article published in April of 2016 shortly after Jeff Smith stepped down as Darden chairman - the Journal said Starboard was sitting on paper and realized profits of $540 million

However, as is becoming our usual - we reviewed all the 13F filings from when Darden first appeared, until they were no longer there. We can only speak in gross terms and can only speculate as to what they made grossly too because we don't know their internal leverage if any, and if they had any other instruments to pronounce position returns.

So… with that in mind, Starboard acquired 11,635,000 shares of Darden between 4th qtr of 2013, and the 4th qtr of 2014 - so one year - based on our own internal calculations of the volume adjusted share price - we suppose Starboard paid ~$516 million for their shares (giving them an average cost basis of ~$44.36 share) 

Starboard began selling blocks of their position in the 1st qtr of 2016 - where they effectively cut the position in half - and sold the rest through the next 2 quarters. Using the same formulas - we can reasonably speculate that Starboard’s proceeds from selling their entire position was ~$734 million (or an average share price of $63.12 a share)

Netting them ~$218 million in gross return or ~$18.75/share. This does not include dividends at the time (which likely added another 60-80 million to their return)

As part of the Starboard initiative - Darden spunout FCPT REIT (Four Corners Property Trust REIT) in this reit’s 1st qtr they issued a special dividend of $8.12/share which based on the 13F for Starboard they likely received ~$31.5 million from the dividend and ultimate proceeds from liquidating their FCPT position likely yielded another ~$72 million in proceeds

This brings their assumed proceeds to ~$400 million on a $516 million investment

Again, we don't know the specifics of their position (leverage wise) and whatnot, but in any event, the investment was certainly a success.

Thank you for reading to the end!

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