Darden Restaurants said Friday it agreed to sell Red Lobster and related real estate assets to investment firm Golden Gate Capital for $2.1 billion, shedding its worst performing chain to pay off some company debt and focus on its flagship brand, Olive Garden.
In the cash deal, Darden will receive net cash proceeds, after tax and transaction costs, of about $1.6 billion for selling the chain with 700 restaurants in the U.S. and Canada. The Orlando-based restaurant company plans to use $1 billion to pay off debt and use the rest to buy back shares.
Sales at casual dining restaurants have been sluggish as their dated format generally doesn't appeal to younger customers who expect quicker service. With Red Lobster struggling, Darden has considered various opportunities to unload it, including a spin-off or separating the restaurant operating entity by selling only real estate.
Darden also reached out to real estate buyers for sale-leaseback financing for the business. And Golden Gate, a private equity firm in San Francisco, has such a deal already in place to reduce its exposure to Red Lobster's real-estate assets. The firm has struck a $1.5 billion sale-leaseback transaction with American Realty Capital Properties for more than 500 Red Lobster restaurants. In the deal, also announced Friday, Golden Gate sells the land and building to ARCP and leases back by paying rent.
Darden said it chose Golden Gate to do the deal because it's an all-cash transaction and allows the company to maintain its current dividend of 55 cents per share, or $2.20 per year.
Shares of Darden fell 3.7% to $48.80 Friday morning.
Red Lobster has been a laggard among Darden's chains. In the three-months period ending Feb. 23, Red Lobster's sales fell 8.7% from a year ago to $611 million.
In comparison, sales at its LongHorn Steakhouse chain rose 0.3%, while Olive Garden reported a 5.4% decline.
Removing Red Lobster from its portfolio frees Darden's management to focus on reinvigorating Olive Garden, which is the company's leading revenue generator.
"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," said Clarence Otis, Darden's chairman and CEO, in a statement.
