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The fishy death of Red Lobster

businessinsider.com

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Re: The fishy death of Red Lobster

#501

Post by jaredklewis »

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.

Why would it be illegal?

When the PE firm took over red lobster, it wasn't a thriving business. They made a gamble: if we sell the land, we can pay down the debt to reduce interest payments and restructure it into a profitable business.

It was always a risky proposition, but the alternative was probably slow decline. The PE firm lost their gamble and they suffered the losses for it.

If the PE firm sold the land to a landlord they owned at discount prices, then yea, that would be a conflict of interest but that isn't what happened.

Re: The fishy death of Red Lobster

#502

Post by skeeter2020 »

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…

The hit from above-market leases vs. owning the land might be clearly visible in hindsight, but that's not necessarily true looking into the future. A buyer could have focused on the economies of scale from being in the seafood business and actually thought "we're not a real estate companye, and rentals are preferable in this inflated market". The got all that current debt off the books in exchange for future liabilities; that could also have looked good.

>> PE firm can sell the business before the chickens come home to roost.

It's really no different from pump and dump. Founders love it because it unlocks a huge pay-out without the hassle, costs and reporting obligations from going public, but if you've worked at a company before and then after a major PE investment it's universally worse IME.

Re: The fishy death of Red Lobster

#503

Post by s1artibartfast »

renewiltord wrote: post #491
MarkMarine wrote: post #484

Earlier quoted context omitted.

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.

Yep, and banks come out ahead on average too. That's why they choose to lend to PE.

Some mortgages and credit cards end in bankruptcy too. They set their interest rate according and it is a cost of doing business.

Re: The fishy death of Red Lobster

#504

Post by civilized »

skeeter2020 wrote: post #496
civilized wrote: post #488

Earlier quoted context omitted.

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…

It sounds like a legal pump-and-dump scheme with sophisticated counterparties. You would think that the counterparties would wise up over time?

Re: The fishy death of Red Lobster

#505

Post by s1artibartfast »

skeeter2020 wrote: post #499
nullc wrote: post #485

Earlier quoted context omitted.

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.

Not every case is a success, but the bad ones are hugely over represented in the media.

Re: The fishy death of Red Lobster

#506

Post by [deleted] »

s1artibartfast wrote: post #500
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.

[deleted]

Re: The fishy death of Red Lobster

#507

Post by civilized »

fallingknife wrote: post #492
civilized wrote: post #488

Earlier quoted context omitted.

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,…

And I suppose the individual owners were paying rent in some form to Red Lobster Inc, since it owned the land? It might be that all that changes for them is who they write the check out to. And possibly the amount, if Red Lobster Inc was in the habit of subsidizing its locations.

Re: The fishy death of Red Lobster

#509

Post by s1artibartfast »

9cb14c1ec0 wrote: post #497

Looks like a prime market opportunity for a competing chain with competent management. The PE firm's loss can now be someone else's long-term gain.

PE sold red lobster in 2016, so you are 8 years too late.

The current owner (for the last 8 years) is the multinational seafood company Thai Union. They conducted a 150million stock buyback the same quarter they declared bankruptcy for Red Lobster, and are doing fine.

Re: The fishy death of Red Lobster

#510

Post by s1artibartfast »

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 ?

You dont understand, the PE firm IS red lobster. The old owners were paid 2.1 billion for the company and retired.
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