A Rare Find: Darden Buys Parent of LongHorn Steakhouse, Capital Grille
For the past several months, Orlando-based Darden Restaurants has openly sought to acquire a proven growth concept with national potential, and yesterday the company found what CEO Clarence Otis calls “the right partner.”
By Derek Gale, Associate Editor -- Restaurants & Institutions, 8/17/2007
The Human SideHere’s how Darden and Rare management talent will be combined: * Phil Hickey, Rare chairman and CEO, will serve for 12 months as an exclusive advisor to the Darden Executive Team (led by Darden CEO Clarence Otis) in connection with the integration and execution of the combined company’s growth strategy. * Gene Lee, Rare president and COO, will become president of Darden’s new specialty restaurant group, including the Capital Grille, Bahama Breeze and Seasons 52 concepts. He will join the Darden Operating Team and the Darden Executive Team. * John Martin will continue to lead the Capital Grille brand as its president. * David George will remain president of LongHorn Steakhouse, and will report to Drew Madsen, Darden president and COO. Madsen also will have responsibility for Darden’s Red Lobster and Olive Garden brands. |
Darden announced an agreement to acquire Atlanta-based Rare Hospitality International Inc., parent of the LongHorn Steakhouse and Capital Grille chains, for $38.15 per share in cash, a deal worth approximately $1.4 billion.
With 287 units, LongHorn is well established in the Midwest and along the East Coast, but with LongHorn’s growth rate of 30 to 35 units per year, Darden clearly sees the opportunity to expand the brand across the country. “With LongHorn, there’s a lot of upside potential,” says Rare CEO Phil Hickey. “We feel it has a footprint close to that of a Red Lobster or an Olive Garden.”
Capital Grille, meanwhile, “absolutely has national potential” as well, Hickey says. With only 29 current locations, “we think there’s plenty of opportunity,” he says. “If we stick to the growth rate of five-plus a year, we think there are a lot of years ahead of us.”
Despite a landscape of hungry investment firms looking to gobble up restaurant companies, RARE was not looking for partner at this time, Hickey says. But “we have a world of respect for Darden,” he says, and he sees the deal as a win for both parties. “If I were to use an overall mantra: This makes sense and everyone wins.”
“I think the synergies are wonderful,” he adds, talking of what Rare gains from Darden’s magnitude in the way of supply chain synergies, marketing expertise and real estate expertise.
Darden CEO Clarence Otis agrees, of course. “The organizations are aligned when it comes to cultures and philosophies,” he notes. “At Darden, we see this as elevating our sales growth rate. This also helps the Rare concepts to achieve national penetration. And it is supported by significant cost synergies.”
Darden’s financial executives put those synergies in the range of $40 million annually by the end of the joint company’s second full year.
Otis also expressed pleasure that Rare’s leadership team will remain with the combined company. “When looking at the combination of Darden and Rare, we see leadership teams that think about the business alike,” he says. “There is a strong cultural fit at the executive leadership level.”
A steakhouse concept such as LongHorn fits nicely into Darden’s group of casual-dining offerings (seafood with Red Lobster and Italian with Olive Garden), while another synergy could be to move the LongHorn brand into some former Smokey Bones Barbecue & Grill locations still owned by Darden. While Otis says the company “would be careful with conversions” because it is comfortable with LongHorn’s growth rate, he notes that Darden will look to see which Smokey Bones properties might be appropriate as LongHorn locations.
And while Darden’s stated goal is to “be the best in casual dining… now and for generations,” with a brand like Capital Grille, Rare also offers Darden the opportunity to play closer to the fine dining space. “Rare has proven upmarket expertise--that will allow us to more confidently build Seasons 52 as a brand,” Otis says. “And it positions us to add additional upmarket concepts over time.”
At a 39% premium to Rare’s average closing stock price for the past month, the deal represents a nice return for Rare shareholders, but Darden shareholders look to come out in the long term as well.
“Ultimately, we will be better positioned to sustain strong sales growth and achieve our long-term objectives,” Otis says. Instead of the 5% to 7% sales growth of the past few years, he sees Darden moving forward at 7% to 9% sales growth, and ramping up new restaurant growth from 3% to about 5%. “The best way to sum it all up is that the partnership of Darden and RARE offers the benefit of a more balanced portfolio as well as increased scale,” Otis says
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