Jeffrey Smith has apparently discovered his inner Bill Ackman. New York–based activist hedge fund firm Starboard Value, which Smith founded, has published a 294-page report detailing how it would transform Darden Restaurants. In a presentation that rivals the Pershing Square Capital Management manager’s case for shorting Herbalife, Starboard asserts that it has identified “specific opportunities” to increase Darden’s annual EBITDA by $215 million to $326 million.
“Specific” is an understatement, though. Besides serving up ways to maximize the value of the company’s real estate and offering his case for spinning off its Specialty Restaurant Group, Starboard, which plans to run a proxy fight to take over the board, also gets into the weeds with its suggestions. For example, Starboard contends that Olive Garden restaurants serve too many breadsticks, leading to waste and reducing the opportunity to sell additional appetizers.
“Servers should ask if guests want more breadsticks, improving temperature of breadsticks and server touch points,” the presentation states.
It also states that salads are “overfilled” and come with too much dressing, leading to added costs and unhappy customers. Starboard also says the straws are “non-industry length,” which raises costs. Discussing the asparagus Olive Garden serves, the presentation lambastes its “tight length and spear specs, not in line with industry norms.” It also questions why the to-go containers need to be dishwasher safe. There is no truth to the rumor however, that Smith is mulling a hostile takeover of Gordon Ramsay’s show.
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UBS is encouraging its clients to bet on the activist campaign involving three major deep discount retail chains. The investment bank initiated coverage of Dollar General Corp. and Dollar Tree with Buy ratings and $81 and $68 target prices, respectively. It also initiated coverage of Family Dollar Stores, but with a Neutral rating and an $80 target price.
“Our bullish rating is predicated in part on the tantalizing prospect that Dollar General emerges victorious in the bidding for Family Dollar,” UBS writes in the Dollar General note to clients. “In a base case given a merger scenario, we calculate that the shares could have more than 60 percent upside over the next few years.”
Its more optimistic calculation gets the stock price up more than 100 percent over the same period. Even if Dollar General does not wind up merging with Family Dollar, UBS tells clients the “story is still sound, but the range of outcomes for the stock will be narrower.”
As for Dollar Tree, there are several possible paths for the stock, and shareholders win either way, UBS states. If the company wins its bid for Family Dollar, the investment bank is confident the company will be able to produce “substantial productivity improvements and synergies” from the acquired stores. If it loses out on the bidding, it still wins because it “walks away with a solid core business, a handsome breakup fee,” the chance to acquire other assets from either another company or divested stores and “the opportunity to continue to return capital to shareholders.”
Several large hedge fund firms have investments in Dollar General, including Barry Rosenstein’s Jana Partners, Larry Robbins’s Glenview Capital Management, Charles (Chase) Coleman III’s Tiger Global Management, Stephen Mandel Jr.’s Lone Pine Capital, John Paulson’s Paulson & Co., Lee Ainslie’s Maverick Capital and Daniel Loeb’s Third Point.
Nelson Peltz’s Trian Fund Management has long been the largest shareholder of Family Dollar, while Paulson was the second largest shareholder at the end of the second quarter. Other investors include Glenview and Kenneth Griffin’s Citadel.
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New York–based hedge fund firm BlueMountain Capital Management lifted its stake in Scorpio Bulkers to more than 9.9 million shares, or 7.1 percent of the total outstanding. The company, incorporated in the Republic of The Marshall Islands, operates a fleet of dry bulk carriers.
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Boston-based Adage Capital Management disclosed an 11.2 percent stake in HeartWare International, which makes medical devices.
