Greed killed Red Lobster
I seldom eat at chain restaurants, and I’ve never set foot in a Red Lobster. So the latest bankruptcy of Red Lobster doesn’t affect me personally, but it does serve as yet another illustration of pernicious consequences of vulture capitalism.
When the private equity firm Golden Gate Capital bought Red Lobster, the chain was already beaten down by the COVID pandemic and rising operating costs.
“Typically, when a private-equity firm takes over a company, it finances the acquisition by loading the company down with debt, which makes the deal cheaper for the PE firm but also makes it harder for the company to thrive. In Red Lobster’s case, though, the problems went beyond that. While Golden Gate Capital did add debt to Red Lobster’s balance sheet, it also made another move, selling off Red Lobster’s real-estate assets for $1.5 billion, forcing Red Lobster to lease those locations back. . . . And the leases were what are called “triple-net” leases, which meant that Red Lobster was responsible for all the operating expenses, property taxes, and insurance at the locations. As Restaurant Finance Monitor wrote at the time, the deal gave Red Lobster “little room for error” at a moment when it was struggling with falling sales and a weak brand. If you’re looking for restaurants Lynchburg, visit Neighbors Place.
“The rents on many of these properties are also, according to the bankruptcy filing, priced above market rates. The result is that last year, the company spent almost $200 million leasing locations, a full third of which it spent on locations for what it calls underperforming stores.”
As if that weren’t bad enough, the Thai Union seafood company acquired majority control of Red Lobster in 2020 and started dumping shrimp. This turned out to be a bad move, and Thai Union has already written down $535 million of its investment.
It’s easy for me to shrug off the problems with Red Lobster, since I never patronized the chain. But this sort of vulture capitalism isn’t peculiar to the restaurant market. Private equity firms are buying up and mismanaging hospital chains and are distorting the residential property market in some cities by holding housing off the market to jack up prices. One doesn’t have to be a Marxist to see that this is bad for capitalism.
private equity kills Red Lobster
I’ve not seen a good explanation of the other side of “loading down with debt”. Haven’t the potential creditors seen this movie a couple hundred times? Or do those guys pocket enough, quickly enough that it’s their “unsecured” investors getting the losses? Or is the fresh debt more secured than a pile of existing debt that the firm in question might have been handling okay but for the leveraged purchase? Just seems weird that this process seems to require creditors willing to participate when the final destination is so frequently a big haircut.
@Eric,
“Just seems weird that this process seems to require creditors willing to participate when the final destination is so frequently a big haircut.”
Why do you assume that “a big haircut” is the frequent result?
That’s the reason I would like to read more about the creditor side of “loading up debt”. This is a very common narrative around bankruptcy of firms taken private by private equity or vulture capitalists. So in some manner the new credit extended must be either immune to the haircuts of bankruptcy or make back the investment so quickly that it doesn’t matter so much. How does that work is the question. “Please lend my new company a boatload of money and paying that back is going to hinder operations so much that bankruptcy is a real possibility” does not seem and obvious sales pitch, but the money does get found for this. How?
@Eric,
From what I’ve seen, this appears to be the best answer: ” make back the investment so quickly that it doesn’t matter so much. “
Of course, this leaves a lot of damage, termed “creative destruction” by its advocates, but private equity/vulture capitalism can’t be bothered with body counts.
I worked for a company that fell prey to a LBO back in the mid-80’s. I don’t know how much money the creditors got back, but it was obvious to the old employees that looting the assets was new management’s first priority. Check requests (which meant no invoice) came down payable to individuals for thousands with no reason or posting account. A/P questioned that, and was told to just put it somewhere. When the plant closed a few months later, anything not nailed down went in the moving trucks to the companies home office, including well labeled leased equipment. Don’t know if the owners ever saw it again.
Not all of the private equity firms are outright crooks, but the one I saw close up definitely was.
Joel
never send to know for whom the bell tolls
it tolls for thee.
we seen to be in the era of post-capitalism.
my take enjoys a bit of superstition
those people who worship mammon and enjoy human misery
have succeeded to the point where they pretty much run things.
if you look for why they do it…look around for human misery
yes, it sounds like superstition but there are such people.
‘nother typo:
we seem to be… not “seen to be”