NEW YORK (CNNMoney) — Darden Restaurants inked a $2.1 billion deal on Friday to unload its struggling Red Lobster business to Golden Gate Capital.
Golden Gate may be able to inject some new life into Red Lobster, but the deal is likely to rile up Darden investors. Shares fell nearly 3% in early trading.
Some hedge funds have criticized Darden for how it is handling Red Lobster. Darden originally planned to spin-off the seafood restaurant chain as a separate publicly traded company before deciding to sell Red Lobster to Golden Gate. The sale is not subject to shareholder approval, Darden said.
Earlier this week, activist investor Starboard said it “condemns” Darden for apparently trying to “rush an irreversible and potentially value-destructive Red Lobster sale” without shareholder approval. Starboard owns 5.5% of Darden, recently warned a sale of Red Lobster could destroy up to $800 million of shareholder value.
Another hedge fund, Barington Capital, had been pushing to break Darden into two separate companies — one with the mature Olive Garden and Red Lobster brands and the other with faster-growing chains like LongHorn Steakhouse. Neither Barington nor Starboard responded to requests for comment about the Red Lobster sale.
Darden expects the sale to Golden Gate Capital will generate $1.6 billion after taxes and transaction costs, money the company plans to deploy to pay down debt, buy back stock and continue paying its dividend.
The restaurant operator said the deal maximizes the value of the Red Lobster business and removes uncertainties related to trying to turn around the chain. At the same time, Darden said it can now focus on righting the ship at Olive Garden, another of the company’s mature and struggling brands.
“We believe this agreement addresses key issues that our shareholders have raised, including the need to preserve the Company’s dividend and regain momentum at Olive Garden,” Darden CEO Clarence Otis said in a statement.
Golden Gate will have its work cut out for it. Red Lobster’s same-store sales in the U.S. tumbled 8.8% during the first three months of 2014, worse than the 5.4% drop at Olive Garden.
But Josh Olshansky, managing director at Golden Gate Capital, said in a statement that “Red Lobster is an exceptionally strong brand with an unparalleled market position in seafood casual dining.”
It’s not clear if Golden Gate plans to close stores as part of the acquisition. The private equity firm did not respond to a request for comment.
To pay for the acquisition, Golden Gate received financing from Deutsche Bank, Jefferies and GE Capital. It also did a $1.5 billion sale-leaseback deal with American Realty Capital Properties for more than 500 Red Lobster properties.
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