The fishy death of Red Lobster • Hacker News Board

Re: The fishy death of Red Lobster

#481

Post by civilized » Sat, May 25, 2024, 12:20 AM UTC

I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is:

Why is this profitable?

If the land is worth $1.5 billion, it should have cost PE more than $1.5 billion to buy the company. Then there would be no way to make a profit by selling the land, paying yourself, and letting the company go belly-up.

Why does PE keep doing this? Presumably because it works? But why does it work? Are the sellers less sophisticated at asset valuation than the buyers, and frequently lowball themselves? Or maybe owners/stockholders are sometimes just tired of holding this asset, want cash to reinvest somewhere else, and are willing to cash out at a discount?

Re: The fishy death of Red Lobster

#482

Post by richk449 » Sat, May 25, 2024, 12:21 AM UTC

romafirst3 wrote: post #479

They sold their real estate for 1.5 billion and then red lobster paid 200 million a year in rent. That’s insane. In 7.5 years they would pay back the purchase price. That just seems like a massively bad deal for red lobster, I wonder was there another way the private equity firm made out on that deal ?

What’s most weird to me is that the PE firm owns Red Lobster. So if a deal is bad for Red Lobster, the deal is also bad for the PE firm.

I guess the reason that isn’t true is differing time horizons. If the consequences of the deal only become apparent years later, then the PE firm can sell the business before the chickens come home to roost.

But how do they sell Red Lobster without the buyer realizing what is going to happen? Who would be dumb enough to buy from a company that has a history of crippling companies it owns then selling them to suckers?

Re: The fishy death of Red Lobster

#483

Post by [deleted] » Sat, May 25, 2024, 12:22 AM UTC

romafirst3 wrote: post #479

They sold their real estate for 1.5 billion and then red lobster paid 200 million a year in rent. That’s insane. In 7.5 years they would pay back the purchase price. That just seems like a massively bad deal for red lobster, I wonder was there another way the private equity firm made out on that deal ?

[deleted]

Re: The fishy death of Red Lobster

#484

Post by MarkMarine » Sat, May 25, 2024, 12:23 AM UTC

civilized wrote: post #481

I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is: Why is this profitable? If the land is worth $1.5 billion, it should have cost PE more than $1.5 billion to buy the company. Then there would be no way to make a profit by selling the land, paying yourself, and letting the company go belly-up. Wh…

I thought the PE model was to buy one of these companies, leverage them with many multiples of debt while paying themselves out massive fees and bonuses, then letting the huge interest and debt load take its toll on the husk of the company.

Re: The fishy death of Red Lobster

#485

Post by nullc » Sat, May 25, 2024, 12:24 AM UTC

civilized wrote: post #481

I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is: Why is this profitable? If the land is worth $1.5 billion, it should have cost PE more than $1.5 billion to buy the company. Then there would be no way to make a profit by selling the land, paying yourself, and letting the company go belly-up. Wh…

Because the asset is worth the net present value of its future cashflows. Unless you take over the the thing and liquidate it, the value of the property is far in the future... so arguably the takeover and liquidation increases its value.

PE here acts like a fungus unlocking the energy stored in dead trees that have fallen to the forest floor. :P If this is good nor not depend on if you're one of the creatures that has made their home in the log, if you're the fungus, or if you're the newly growing shoots that appreciate clearing out the obstructions.

Re: The fishy death of Red Lobster

#486

Post by fallingknife » Sat, May 25, 2024, 12:27 AM UTC

civilized wrote: post #481

I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is: Why is this profitable? If the land is worth $1.5 billion, it should have cost PE more than $1.5 billion to buy the company. Then there would be no way to make a profit by selling the land, paying yourself, and letting the company go belly-up. Wh…

It's not. They paid $2.1 billion for Red Lobster and sold the land for $1.5 billion. Now it's bankrupt so they lose $600 million.

Re: The fishy death of Red Lobster

#487

Post by skeeter2020 » Sat, May 25, 2024, 12:32 AM UTC

Cheer2171 wrote: post #480

Private equity firm wants to buy Red Lobster, but they don't have enough money. So to afford the sale, they make a deal to sell the land every Red Lobster sits on to a firm that will charge Red Lobster above-market rate rent to stay in business. This doesn't seem like it should be legal.

Well, they DID have to scrape together a few % of the purchase price

Isn't this what Gordon Gecko did in the movie Wall Street? Look for asset-rich companies, buy a controlling interest of the stock (the equivalent of the PE leveraged buyout) then strip them for parts? Also, wasn't that a cautionary tale of the worst of the 80's vs. a "how to" manual?

Re: The fishy death of Red Lobster

#488

Post by civilized » Sat, May 25, 2024, 12:33 AM UTC

fallingknife wrote: post #486

civilized wrote: post #481

I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is: Why is this profitable? If the land is worth $1.5 billion, it should have cost PE more than $1.5 billion to buy the company. Then there would be no way to make a profit by selling the land, paying yourself, and letting the company go belly-up. Wh…

It's not. They paid $2.1 billion for Red Lobster and sold the land for $1.5 billion. Now it's bankrupt so they lose $600 million.

Good point. I think this changes the story a bit. It's not exactly that PE is predatory. If PE were unlocking the value of assets held by an underperforming company, the transaction could be explained as the creative destruction of capitalism making room for something better to hold those assets.

In this case, it's more like private equity wasn't as smart as Red Lobster's owners, so now Red Lobster's owners have extra capital to allocate in the economy. Which is also arguably good.

If you liked the restaurant, of course, none of this is much comfort. But if nobody with a ton of money thinks Red Lobster is a good use of capital, from either a financial or sentimental perspective, it may go the way of the dodo.

Re: The fishy death of Red Lobster

#489

Post by vundercind » Sat, May 25, 2024, 12:35 AM UTC

richk449 wrote: post #482

romafirst3 wrote: post #479

They sold their real estate for 1.5 billion and then red lobster paid 200 million a year in rent. That’s insane. In 7.5 years they would pay back the purchase price. That just seems like a massively bad deal for red lobster, I wonder was there another way the private equity firm made out on that deal ?

What’s most weird to me is that the PE firm owns Red Lobster. So if a deal is bad for Red Lobster, the deal is also bad for the PE firm. I guess the reason that isn’t true is differing time horizons. If the consequences of the deal only become apparent years later, then the PE firm can sell the business before the chickens come home to roost. But how do they sell Red Lobster without the buyer realizing what is going…

… who’d PE sell the land to?

Was it… themselves, in some roundabout way?

Re: The fishy death of Red Lobster

#490

Post by skeeter2020 » Sat, May 25, 2024, 12:36 AM UTC

fallingknife wrote: post #486

civilized wrote: post #481

I have the same question every time I see one of these articles. I think I've even posted the question in previous HN threads on private equity shenanigans. The question is: Why is this profitable? If the land is worth $1.5 billion, it should have cost PE more than $1.5 billion to buy the company. Then there would be no way to make a profit by selling the land, paying yourself, and letting the company go belly-up. Wh…

It's not. They paid $2.1 billion for Red Lobster and sold the land for $1.5 billion. Now it's bankrupt so they lose $600 million.

No, this isn't true. First they no longer own it; we don't know what the sale terms were. Second (and more importantly) PE is a term-based play; if you do it right you get both the returns over the life of your fund by directing more revneues to payouts, aggresively cutting costs and eroding long-term investment (like commercial real estate) AND you sell at the right time to generate a multiple return (before all those unfavourable leases start to impact financials). Red Lobster 18-24 months ago could have sold at a premium to the $2.1B purchase price.