By David Benoit And Matt Jarzemsky
Some bondholders are having a tough time swallowing Darden
Restaurants Inc.'s plan to separate its real estate.
A group of bondholders has informed the Olive Garden parent they
will call a default if Darden completes the real estate separation
without their consent, according to people familiar with the
matter. The bondholders declined to give their consent in exchange
for a payout that Darden offered earlier in July, the people
said.
The conflict pits the bondholders, which people say include Voya
Financial Inc., American International Group Inc. and Reef Road
Capital Management LLC, against Starboard Value LP, the activist
investment firm that last year won a board coup at Darden and took
over the restaurant company.
Starboard in its campaign maintained, among other things, that
Darden would be better off selling its real estate and then leasing
it back, putting the cash from the sale to other uses. In June, it
announced such a plan.
Now, some bondholders are resisting, noting their bonds have
restrictions on the company's sale-leaseback activities.
Starboard-led Darden maintains it doesn't need bondholders'
consent to press ahead, but nevertheless offered them a deal, which
they rejected. "Any transaction we would undertake would be in
compliance with our covenants," Darden said in a statement
Wednesday.
"We should make it clear that consent is not a requirement to do
what we want to do, but it's certainly the preferred route," said
Bill White, the company's treasurer, on a conference call in June,
when Darden announced the plan.
The company told the bondholder group it has a legal workaround
allowing it to pursue the deal without their approval, the people
said. But Darden has so far declined to share the structure of that
transaction with the creditor group despite its requests, some of
the people familiar with the bondholders added.
The company in June launched an offer to pay certain bondholders
$5 per $1,000 in notes they hold in exchange for their support of
the deal, then doubled that offer to $10. Mr. White said the intent
was to work with its bondholders.
Bondholders in the group maintain the offer wasn't enough, the
people said. The group represents holders of more than two-thirds
of Darden's 6.8% senior notes due in 2037 and hired law firm
Stroock & Stroock & Lavan LLP to represent its interests,
the people said.
The dustup marks a new challenge to the rising power of activist
investors who typically buy stocks and push for measures they think
will boost share prices, such as taking on more debt to buy back
shares or breaking the company up.
Some big pushes lately have been real estate focused, with
investors urging companies to sell their buildings or land and rent
it back. The moves can deliver cash that can be used for stock or
debt repurchases. Starboard earlier in July revealed it has also
been pushing Macy's Inc. for a similar step. Macy's has said it is
reviewing its real estate.
Such moves have drawn wary looks from investors in corporate
debt, which can suddenly become riskier if a company reduces its
cash or adds fixed payments, such as leases.
"Activism is rarely good news for creditors," Moody's Investors
Service wrote last year, one of several reports to credit investors
warning of increased risk from shareholder activism.
Moody's and other credit rating firms regularly warn they are
reviewing for possible downgrade companies that take steps activist
shareholders push or even companies under pressure to take steps.
Companies, including Darden's previous management, have seized on
such warnings as support for their arguments against activists'
recommendations.
Starboard led a campaign that removed the entire board of
directors at Darden in October. The hedge fund, and before it
smaller activist Barington Capital Group LP, said they believed
Darden's management was performing poorly and the company's vast
real estate holdings were worth billions to shareholders.
In September, Starboard released a presentation detailing what
its board would do if it won the shareholder election -- steps as
small as salting pasta water and as broad as breaking up the
company's brands and its real estate.
Starboard had said throughout its campaign it would keep an
investment grade rating on Darden. When the real estate spin off
was announced in June, Moody's called it a "credit positive" as
Darden plans to repurchase $1 billion in bonds with proceeds from
the plan.
Write to David Benoit at david.benoit@wsj.com and Matt Jarzemsky
at matthew.jarzemsky@wsj.com
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