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Hedge fund, OSI part ways

Pirate Capital had demanded that the parent of Outback Steakhouse break up its chain of restaurants. Getting nowhere, it bails out.

Published August 29, 2006

Pirate Capital LLC has stopped rattling the sabers at OSI Restaurant Partners Inc. by quietly dumping its 5.3 percent stake in the struggling Tampa chain.

Thus ends the Norwalk, Conn., hedge fund's short but stormy feud with the operator of Outback Steakhouse and six other casual-dining chains.

Since June 6, Pirate had urged a breakup of OSI in hopes of unlocking a payoff to shareholders of the company's faster-growing, younger chains: Bonefish Grill, Carrabba's Italian Grill and Fleming's Prime Steakhouse & Wine Bar.

OSI's dominant Outback brand, meanwhile, has joined several sitdown restaurant chains in paring prices to overcome a summer slump.

Guest counts were down 4.4 percent across the $68-billion casual-dining industry in June and sales in stores open more than year slumped 1.8 percent, according to USA Today. Chains from Applebee's to T.G.I. Friday's trimmed prices. Outback sliced $1 off its sirloin prices in some markets, and discounts are spreading to other dishes. About one of every five Outback diners orders a sirloin.

In June, Pirate threatened to run its own slate of directors in 2007 if OSI ignored its demands to slow the growth of its dominant Outback brand, step up the level of stock buybacks and spin off the three other chains.

Officials with Pirate, who paid $92-million for their stake, had no comment on the decision after writing their investors of the sale in a letter dated Aug. 21. Pirate paid $39.20 to $42.03 a share for the stock and options between April and June.

OSI shares have not traded above $35 since late June and closed Monday at $29.32, up 32 cents. OSI was among the fund's four worst performers of the year.

Controlled by Thomas Hudson, a onetime Goldman Sachs vice president and distressed bond trader, Pirate fashions itself as an activist buyer of undervalued stocks that peppers management with its own ideas to enhance shareholder value.

Hudson's company revels in the troublemaker role. Pirate used three versions of "Jolly Roger" in the names of its funds that invested in Outback. After bailing out, the Pirate newsletter listed the OSI stake in its "shipwrecked" column.

This time, however, the pirate walked the plank.

In the newsletter Hudson apologized to his investors after his once high-flying funds either lost money or turned in a mediocre performance so far this year.

OSI, which said it evaluated Pirate's suggestions, had little to say about Hudson's cashing out.

"We remain committed to maximizing shareholder value and will continue to evaluate and implement strategies that deliver value for the long term," said Bill Allen, OSI chief executive officer.

Mark Albright can be reached at or 727 893-8252.

[Last modified August 29, 2006, 00:04:24]

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