Denny’s Corp. battles for its future

By Dick Hughes  

APRIL 25, 2010 1:10 p.m. (0)

Denny’s Corp. is in a fierce struggle with dissident shareholders who want to oust the chief executive officer, the chairwoman and former chairman from the board of the Spartanburg restaurant chain.

Both sides insist their interest is in preserving Denny’s “iconic” status as having grown from a donut shop in California 57 years ago to America’s No. 1 eatery only to fall on hard times in the 1990s.

They agree on little else.

The Committee to Enhance Denny’s, as the challengers call themselves, is urging shareholders to replace President and CEO Nelson J. Marchioli, 60, Chairwoman Debra Smithart-Oglesby, 55, and former chairman Robert E. Marks, 58, with individuals associated with its group.

The committee supports election of the five other directors: Brenda Lauderback, 59, Louis P. Neeb, 70, Donald Robinson, 57, Donald Shepherd,73, and Laysha Ward, 42, the latter appointed in January.

Yet, it is critical of Lauderback, Neeb, Robinson and Ward for not owning outright a single common share.  Shepherd has 44,853, Smithart-Oglesby 28,900, Marks 88,753, and Marchioli is the largest individual owner with 3.2 million.

The dissidents accuse management of frittering away Denny’s dominant position in the family restaurant niche, standing by while IHOP increased from 922 to 1,456 restaurants while Denny’s dropped from 1,822 to 1,551.

They say management has been indifferent to stock value, neglectful of shareholders and franchisees, wasteful of money on ill-conceived remodeling, flagrant in overpaying executives, slow in addressing a decline in guest traffic and tactically wrongheaded in raising meal prices in a recession.

They also believe management botched a Super Bowl promotion and an attempt at social networking with Twitter.

The company defends management as having delivered “some of the best results Denny’s has had in many years,” built long-term stock value, cut administrative costs, reduced debt by half, increased return on assets, eliminated underperforming restaurants, added a record 40 restaurants in 2009, converted many company-owned restaurants to franchise-owned, and rolled out new economy meal programs.

The board cites the agreement for Denny’s to become the restaurant for some Pilot Travel Centers and, if the FTC approves a Pilot takeover of the bankrupt Flying J, the Flying J stops, too.  The potential is 190 new restaurants, the board says.

The board also released a letter of support from the Denny’s Franchisee Association representing 85 percent of Denny’s franchises, but the association did not endorse any candidates.

Denny’s board says the dissidents are stealth hedge funds embarked on a corporate raid.

The board accused unidentified members of the group of having a “well-documented history of pursuing board seats on companies with the intent of ultimately attaining a position where they pursue their personal agenda, including taking control of these companies without paying a control premium to the rest of the stockholders and utilizing those companies as platforms to fund other acquisitions and business initiatives.”

The Committee to Enhance Denny’s said its one major goal is to “maximize the value of the shares for all stockholders.”

The committee is comprised primarily of four investment firms, holding stock under different funds and names but in some cases intertwined, and one person with no direct affiliation with the firms.

They include Oak Street Management of Chicago; Dash Acquisitions of Beverly Hills and Patrick Walsh, a senior partner of Oak Street; Soundpost Capital and Lyrical Capital, both with addresses in New York and the Cayman Islands, and Patrick H. Arbor of Chicago, who is not directly affiliated with the funds.

The committee is promoting the election of Arbor, 73; Jonathan Dash, 30, of Dash Acquisitions, and David Makula, 32, founder of Oak Street.  The committee’s proxy said Dash helped “revitalize the marketing, supply chain and research and development of Steak ‘n Shake.”

In communications with stockholders, the committee said it was not seeking control of the board but rather want to send a message to the remaining incumbent directors that stockholders are not satisfied with the company’s performance and management.

Nor, said the committee, did it seek at this time to replace Marchioli as president and CEO, though it directly attacked him as being ineffective and the board for nonetheless awarding him generous compensation packages.

The committee acknowledges that even if its three nominees win they can be outvoted by the company-backed majority.

According to the company, Marchioli’s annual compensation, including base salary, stock awards and options, incentive bonuses in cash and stock, and taxable perks, has declined since 2007.  In 2007, he received $3.2 million. In 2008, it was $2.6 million, and last year it was $2.1 million.

Marchioli joined Denny’s as president and CEO in 2001, two years after its then-parent company was coming out of bankruptcy.

Under his direction, the company biography says, Denny’s “achieved a successful financial, cultural and brand turnaround placing Denny’s in the strongest financial position in more than 20 years.”

After four years of losses, the company turned profitable in 2005.

In its proxy statement, the board said there will be no across-the-board salary increases for the second consecutive year.  It also realigned incentive programs to tie them more closely with increasing same-store sales and building shareholder value against competitors.

In 2009, Denny’s reported adjusted income before taxes of $30 million, up from $23 million in 2008, even as revenue fell in that period to $608 million from $760 million.

The committee’s 6.3 million shares gives it 6.5 percent ownership and makes it the fourth largest holder of shares. All told, institutions and mutual funds control 84 percent of Denny’s nearly 99 million shares.

However the election turns out, shareholders will pay. Both sides hired outside firms specializing in proxy solicitations, and the company is obligated to pay both sides.

The Committee to Enhance Denny’s says it expects its solicitation will cost $475,000. The company reports it is paying a solicitation firm a fee of $180,000 plus out-of-pocket expenses.

Denny’s began in 1953 as Denny’s Donuts in Lakewood, Calif., grew and morphed into Denny’s as a full-menu restaurant chain and moved to Spartanburg in 1981.  It employs 11,000.