Thanks to the Fed's 6 years of ZIRP, activism, i.e., loud, brash billionaires who come in and tell a company's management they need to use cheap debt to repurchase stock, engage in reckless M&A or spin off profitable units or they will become even louder and brasher has become one of the only profitable hedge fund strategies. Of course, this will cease the moments rates show even the smallest hint of rising but until then it is paradise for all activist hedge funds. In fact, the scramble for activist strategies is so big that WSJ reported earlier today that "funds under management by these activists and others grew by $9.4 billion in the first half of the year to $111 billion, gaining more in that period than in the previous two years combined, according to industry researcher HFR. Mr. Loeb and some other activists have described the current environment as the best they have seen for raising cash." Thanks Fed.
But how do you know when hedge fund activism has gone too far? Well, a good example is the 300-slide presentation (because more slides is always better than less when pitching quantity over quality) which Starboard Fund filed yesterday as "advice" to the management of Darden Restaurants, owner of Oliver Garden, on how to boost shareholder value and also steps the hedge fund would take to generate returns if it wins control of the entire board. Because while in addition to comping up with fleeting and imaginary valuations based on EBITDA projections and multiples, this is the first time that a hedge fund actually tells a restaurant company how to, drumroll, cook.
As the WSJ reported earlier [4], among the moves Starboard detailed in its never-ending presentation, in addition to using salt when cooking pasta, and going easy on the breadsticks, Starboard also had suggestions how to improve "food quality and alcohol sales, introduce technology to reduce waiting times at restaurants and cut millions in costs. And Starboard is sticking with its suggestion, which Darden has rejected as value-destroying, of separating the company's brands apart and putting its real estate into a third public company."
Needless to say Darden wasn't very impressed with this overture, and said it would review Starboard's plan, but added after its initial review it believed many of the changes were already being made under management's ongoing turnaround, which it says is working. "We remain open minded toward all ideas that support long-term value creation for our shareholders and improve the dining experience for our guests," Gene Lee, the company's chief operating officer, said in a statement.
So does cheap credit mean hedge funds know how to cook? Take a look at the following hilarious slide and decide:
Menu innovation is a top priority and is among our nominees' biggest strengths
The entire experience of food, service, and environment must be authentic and provide a joyful and genuine Italian dining experience.
- The food will be fresh whenever possible, with simple choices.
- Menu items will be designed to help facilitate operational excellence and consistency by the restaurant staff.
- We will embrace authenticity, especially as it pertains to the absence of preservatives, stabilizers, gums, additives, artificial colorings, and flavorings.
- We will no longer disregard sound nutrition. Nutrition will not be the driving force, but it will now be carefully considered while greatly improving the taste and appeal of every dish.
- Some parts of the menu can be flavor-forward with fresh ingredients: extra virgin olive oil. lemons, ripe tomatoes, an array of colorful vegetables, lean meats, and fresh fish.
- Portion sizes may be gradually reduced, as guests will begin to equate Olive Garden's value proposition more with quality and excellence at fair prices, than with massive quantities of barely edible fried items, excessive cheeses, and heavy cream sauces.
- Olive Garden's breadsticks are part of the brand equity, as they come to every table. The breadsticks need to be of the highest quality, with a better taste and a frimer texture, and each table must receive hot breadsticks.
- The pasta at Olive Garden must be significantly improved. It must be prepared at the proper water temperature, boiled in salted water, precisely timed to not overcook, and tossed with sauces for each dish instead of the current practice of ladling sauce on top of heaps of coagulated pasta.
- We must rethink the amount of items from the flyer. Most fried foods are not authentically Italian and it slows service.
- We will explore a few gluten-free options, as many consumers prefer gluten-free dishes (1) Based on extensive research and discussions with culinary experts and suppliers, we believe we can accomplish these goals at Olive Garden's current price points without hurting margins
Based on extensive research and discussions with culinary experts and suppliers, we believe we can accomplish these goals at Olive Garden's current price points without hurting margins
Source: Czar gluten free data.
(1) "Gluten" and "Gluten free" are now among the top searches related to Oliver Garden, per Czar Metrics
Bottom line: thanks Ben and Janet's ruinous monetary policies we present unintended consequence number X+1: hedge funds, armed with cheap debt, tell a restaurant company how to cook. The New Normal truly never ceases to amaze...
Full presentation below: