Darden Extends Gains; Next Catalyst Is CEO Pick

Darden Restaurants (NYSE: DRI) shares continued to gain Tuesday while analysts mulled news that CEO Clarence Otis had been forced out by activist investor Starboard.

The next catalyst for Darden may come when Otis' replacement is named. Starboard, which seeks Darden's break up, could exert a decisive influence.

Miller Tabak's Stephen Anderson put the break-up value of Darden at $67 per share; a less aggressive spinoff of its specialty restaurant group would yield $17 per share, said Anderson, who rates Darden a Buy with a $56 target.

Chances of either scenario within the next 12 months are 40 percent, Anderson said; should neither a spinoff or break-up occur, he values the shares at $49.

Although Darden said Monday it will nominate three Starboard representatives to its 12-member board, Starboard has already nominated a full slate and efforts to avert a September 30 proxy battle have proven so far unsuccessful.

Tabak said the fight may still be settled if Starboard can exert a decisive influence on naming Otis' successor.

The most likely pick in Anderson's view: Brad Blum, a paid advisor to Starboard and former head of Burger King and Romanos Macaroni Grill where he helped execute turnarounds.

Others Anderson sees in the running include Charles Sonsteby, chief financial offier of privately-held Michael's Stores; and Alan Stillman, founder of TGI Friday's and a current partner in Fourth Wall Restaurants, a group of upscale New York City restaurants.

Bank of America's Joseph T. Buckley agrees that although investors are pleased by Otis' departure, "the announcement of a new CEO is even more critical, and the decision has yet to be made."

Buckley maintains a Hold rating and a $50 target and called its annualized $2.20 dividend, representing close to a 100 percent earnings payout, "uncomfortably high."

Another analyst cautioned that Darden's underlying poor performance ought not be overshadowed by the "drama and theatrics" of recent news.

"There's a lot of work to be done," said Wunderlich's Robert Derrington, noting weakness at Darden's key Olive Garden brand.

"Regardless of who wins control, we believe there are no winners unless Olive Garden's traffic bleeding can be arrested," said Derrington, who maintains a Hold rating and $54 target.

Darden closed Tuesday at $46.88, up 4.36 percent.