On September 10, Jeffrey Smith’s Starboard Value Lp filed two Schedule 13D forms with the SEC, disclosing its current stakes in Darden Restaurants Inc. (NYSE:DRI) and Office Depot Inc. (NYSE:ODP). However, this was not the main purpose of the filings. The fund wanted, in fact, to make two pieces of news public:
On September 8, 2014, Starboard filed an Expedited Motion in the Florida Circuit Court against Darden Restaurants Inc. (NYSE:DRI), seeking an order to lift confidentiality designations agreed with the company on August 18 – as the company didn’t fully comply with court orders that obliged it to allow the fund to inspect and copy corporate books and records.
The conflict first started on June 5, 2014, when Starboard demanded production of certain of the company’s books and records. “Starboard sought these books and records in order to gain additional insight and learn more as to the analyses, processes and rationale that ultimately led to the Issuer’s agreement on May 16, 2014 to sell Red Lobster at what Starboard believes to be a fire sale price to Golden Gate Capital,” the fund assured in the filing. As a definitive agreement was not reached, the fund filed a Complaint with the Circuit Court for the Ninth Judicial Circuit, in and for Orange County, Florida, which decided that Darden Restaurants Inc. (NYSE:DRI) should present all of its books and related records to Starboard.
Mr. Smith’s fund is not yet happy with the information provided by the company, and has filed a new motion, seeking permission to make public some of its findings.
“Starboard notes, however, that even without the benefit of the disclosure of its findings from the review of Darden’s books and records, evidence of material inconsistencies between public statements made by the Issuer and private statements made to debt investors by the Issuer’s then-current employees has come to light. An August 19, 2014 CNBC article entitled “Fishy financial disclosure at Darden’s Red Lobster” appears to confirm that management and the Board’s repeated public statements portraying Red Lobster as a struggling business whose earnings would inevitably decline are inconsistent with the internal expectations of Red Lobster management and the Issuer’s financial advisors. According to CNBC, in a memo presented to potential Red Lobster debt investors, Red Lobster’s management purportedly explained how the underperformance it faced this year was due primarily to temporary factors, such as inflated shrimp prices, and that Red Lobster management actually expected significant improvements, not declines, in Red Lobster’s performance,” the fund added.
In the other filing, Starboard disclosed the termination of a 10b5-1 Sale Plan Agreement that it had entered into, with J.P. Morgan Securities LLC, on November 18, 2013, which provided for the sale of up to 11 million shares of Office Depot Inc. (NYSE:ODP). However, the fund decided to end the agreement, notifying J.P. Morgan Securities LLC, before this last company could sell any stock under the Trading Plan.
On that same date, Mr. Smith resigned from his position as a member of Office Depot Inc. (NYSE:ODP)’s Board of Directors. The fund explained that his resignation “was not related to any disagreement or dispute” with Office Depot Inc. (NYSE:ODP).
According to these filings, Starboard owns 11.63 million shares of Darden Restaurants Inc. (NYSE:DRI), and 46.36 million shares of Office Depot Inc. (NYSE:ODP). These positions are worth more than $560 million and $261 million, respectively, at current stock prices, and make of Starboard the largest hedge fund shareholder of record (amongst those we track) at both companies.
Another hedge fund betting on both Darden Restaurants Inc. (NYSE:DRI) and Office Depot Inc. (NYSE:ODP) is Ken Griffin’s Citadel Investment Group, which owns 331,885 shares, and 968,525 shares, respectively.
Disclosure: Javier Hasse holds no positions in any stocks or funds mentioned.