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 and 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.
Red Lobster's new private equity overlords will face a tough task as they attempt to revitalize the business. But because Red Lobster won't be publicly traded anymore, Golden Gate can avoid harsh scrutiny from Wall Street. One person familiar with the deal noted that a Red Lobster spin-off would have been a hard sell to investors.
"The reality is this business is declining pretty rapidly. That's a tough story as a public company," the source said.
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."
Golden Gate did not announce plans to close any of Red Lobster's 700 stores and the private equity firm did not respond to a request for comment. However, the person familiar with the matter said store closures are likely, though not at a "dramatic" scale.By cutting Red Lobster loose, Darden will now be able to zero in on fixing Olive Garden.
"All of the turnaround focus can be 100% on Olive Garden rather than fighting a war on multiple fronts," said the person familiar with the matter.
To pay for the acquisition of Red Lobster, Golden Gate received an undisclosed amount of financing from Deutsche Bank, Jefferies and GE Capital. It also did a $1.5 billion sale-leaseback deal with American Realty Capital Properties (Darden said it contacted about 70 possible strategic and financial suitors for Red Lobster beginning in December. The company said it also contacted about 25 potential real estate buyers. ) for more than 500 Red Lobster properties.