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The fishy death of Red Lobster

businessinsider.com

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Re: The fishy death of Red Lobster

#491

Post by renewiltord »

MarkMarine wrote: post #484
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.

So the sucker here is the bank? Can't say that I care that much about that. It's just business and the banks apparently suck at it. They can foreclose on the business and sell it off to someone who relaunches it.

Re: The fishy death of Red Lobster

#492

Post by fallingknife »

civilized wrote: post #488
fallingknife wrote: post #486

Earlier quoted context omitted.

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 extr…

Correct. Everything is working fine. If those individual Red Lobster locations are making money, they will continue to exist because the lenders will get paid back more by cutting a deal and continuing to operate than by closing the restaurants. If the individual restaurants are not making money then they will close, as they should. The overall demand for restaurants is unchanged in either scenario, so if they close, their place will be taken by other restaurants.

Re: The fishy death of Red Lobster

#493

Post by civilized »

MarkMarine wrote: post #484
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.

It often is, but this isn't some kind of free money tree that only rich people can access. Loading up a company with debt requires a creditor. Selling underlying assets requires a buyer. If these counterparties don't offer enough money to offset what PE spent to buy the company, PE loses. And this often happens, including, apparently, in this case!

Re: The fishy death of Red Lobster

#494

Post by fallingknife »

skeeter2020 wrote: post #490
fallingknife wrote: post #486

Earlier quoted context omitted.

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 tho…

Are you accusing the PE fund of defrauding the buyer? If not then it's just a bad investment on their part and lucky for the PE fund, but if you are then you damn well better provide some actual evidence.

Re: The fishy death of Red Lobster

#495

Post by romafirst3 »

vundercind wrote: post #489
richk449 wrote: post #482

Earlier quoted context omitted.

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?

That’s what I’m wondering, or if they got some other compensation that isn’t mentioned.

Re: The fishy death of Red Lobster

#496

Post by skeeter2020 »

civilized wrote: post #488
fallingknife wrote: post #486

Earlier quoted context omitted.

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 extr…

The PE playbook (assuming 5 year term):

1. buy asset-heavy companies with good cashflow and add to you portfolio. 2. aggressively cut costs on long-term investments like R&D, major capital projects, and squeeze OPEX 3. at the same time focus solely on S&M. If possible get everyone on multi-year contracts that last until year 6 (often with heavy discounting on the back end) 4. shed impressive dividends over the term 5. years 3-4 make signalling investments that hint towards hockey-stick growth: (real life) examples: 1. replatform your database from on-prem to AWS, 2. move OFF aws to fixed-provisioned (I'm not making this up) 6. shop for a new PE fund to sell. Look for a 3x or higher multiplier on initial investment 7. sell, repeat, parchute in your bench of executives.

Eventually you've got a bunch of companies that look like subprime-backed CDOs

Re: The fishy death of Red Lobster

#498

Post by RockyMcNuts »

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 a bust-out, you identify a patsy and you stick it to them.

sometimes the company is worth more dead than alive, the parts are worth more the whole, especially when you can leave someone holding the bag, and the PE company gets paid to make them dead.

in any event the company is worth more to an extremely unscrupulous buyer than as a going concern in public markets.

https://www.dailymotion.com/video/x4348lj

Re: The fishy death of Red Lobster

#499

Post by skeeter2020 »

nullc wrote: post #485
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 h…

I debate if PE unlocks or unsustainably accelerates. I think it comes down to should a small minority get very rich quickly, or should a going concern support a much broader ecosystem. I have seen PE "wreck" a few companies first-hand, so my selfish preference is the former.

Re: The fishy death of Red Lobster

#500

Post by s1artibartfast »

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, contrary to public belief, PE firms are skilled and sophisticated managers.

Most deals are successful under their management, and this is why banks usually lend 70-90% of the purchase funds.

They specifically target companies that are undervalued, in distress, and can be turned around or liquidated for more than the cost.

PE isn't an exotic business philosophy. It is literally just a private buyer.

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