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The fishy death of Red Lobster

businessinsider.com

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Re: The fishy death of Red Lobster

#531

Post by romafirst3 »

refurb wrote: post #515
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 ?

It’s not insane. Holding a ton of a cash locked up in assets is highly inefficient. Google did this - sell a building they own and lease it back. Do something else with the money. The nice thing about the lease is that it’s a tax deductible expense for the business, and if you no longer need it, just don’t renew the lease.

No I don’t mean the strategy, I mean selling the real estate for 7.5 years of rent. Usually the multiple is closer to 20x

Re: The fishy death of Red Lobster

#532

Post by romafirst3 »

s1artibartfast wrote: post #510
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.

I do understand

Re: The fishy death of Red Lobster

#533

Post by romafirst3 »

romafirst3 wrote: post #532
s1artibartfast wrote: post #510

Earlier quoted context omitted.

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

I do understand

I’m using the terms correctly it’s just that while red lobster is owned by the PE firm, the PE firm is more than red lobster.

Re: The fishy death of Red Lobster

#534

Post by projektfu »

s1artibartfast wrote: post #526
projektfu wrote: post #525

Earlier quoted context omitted.

I'm not sure those vet deals are profitable yet. A lot of the deals in the last 10 years will be looking for their exit soon and I'm not sure there are buyers.

Interesting. I always wonder why vets don't just jump ship and start their own clinics.

Because the money isn't good right now. Before PE, vets were making $60k out of school and maybe $100-120k after 10 years. Now, PE has caused a huge run up in salary because people aren't excited to work for them. New grads are starting at $100k and experienced vets are asking for $150-200k. While there's a glut of PE money they're financing all this and hoping to make it back somehow down the line. But a doctor-owned clinic would have a start up cost of probably $750k to $1M (or more) and that would be financed at 8-10% over 10-15 years now. They'd have to rent and build out a space or buy it on 25 year amortization. Loans have a personal guarantee.

You generally can't solicit your old clients so they'd have to choose to find you and you'd have to build the rest of your practice. Lots of risk.

You could expect to pull the new grad salary and use the rest of the cash flow to cover your loan. If things go well, you could be making a good salary and sitting pretty after 10 years. Or you might underperform and find yourself struggling to pay your staff while taking a minimal salary until you can get out from the loan.

If PE clinics underperform, they just shut them down and write it off.

Re: The fishy death of Red Lobster

#535

Post by MarkMarine »

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.

I think the sucker is always regular people. The ones that worked at these companies, and the collective us that the banks pass these costs down to

Re: The fishy death of Red Lobster

#536

Post by MarkMarine »

civilized wrote: post #493
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.

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!

“ us what happened with Toys “R” Us—how it went from a successful and iconic retail chain into bankruptcy [and] left employees with a $60 severance, while the private equity-anointed CEO cashed out with a $2.8 million exit package. It’s a really fascinating story. And I think it illustrates a lot of what works and doesn’t work in private equity. [In] 2005 a coalition of three firms, KKR, Bain, and Vornado, bought up Toys “R” Us for several billion dollars. Now, here’s the trick about private equity: They invested a little bit of their own money and investor money, but most of the acquisition was paid for with debt. And it was [not debt] that the private equity firms would hold—it was debt that Toys “R” Us would be responsible for paying. And that [debt] turned out to be enormous, and enormously burdensome. In fact, the common story around Toys “R” Us is that it was defeated by Amazon, that the wave of e-commerce made their business obsolete. That wasn’t actually true. In fact, Toys “R” Us was profitable the year before it filed for bankruptcy. The challenge that it had was [that] it was spending as much on servicing the debt as it was on actually making income. So part of the problem with the private equity acquisition was the reliance on debt. The other [problem] was the disinvestment in the business itself. Reportedly, the private equity firms slashed investment in basic things like store upkeep to such an extent that people were complaining that so much dust gathered in the rafters that it was...falling down onto customers like snowflakes. Beyond just disinvestment, they executed various tactics that brought money from Toys “R” Us to the private equity firm—things like extracting an estimated $180 million in fees.“

https://open.substack.com/pub/adaml/p/a-conversation-with-br...

Re: The fishy death of Red Lobster

#537

Post by MarkMarine »

joegibbs wrote: post #527
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.

But why would anyone lend to a company which has been bought out by a PE firm then? Wouldn't banks turn around and say "hold on, I know this old trick, you're going to take loads of my money and then give it to yourself and default, and I get nothing"?

The PE firms use the debt from their purchase of the business to load them up. They don’t even put their own money into it.

Re: The fishy death of Red Lobster

#538

Post by tharmas »

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.

Don't the banks just print the money when they lend out anyway? Before the loan the money didn't exist. I suppose the bank is still holding the bag for the unpaid debt.

Re: The fishy death of Red Lobster

#539

Post by nullc »

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.

I have less of an opinion on specific cases or even the overall effect-- but I do think it's important to realize that there can be non-incidental public benefits or even when there isn't a benefit specifically that the outcome was sometimes inevitable and in which case if you're to attribute fault to the PE it ought only be for the acceleration.

Re: The fishy death of Red Lobster

#540

Post by johngladtj »

rondini wrote: post #477
johngladtj wrote: post #470

Earlier quoted context omitted.

Sometimes that's the best option.

For who? Was that the best option for the employees who relied on the income? Or the customers who enjoyed the food? There are plenty of actions that are rational from an economics standpoint as long as you don't care about any of the externalities such as human dignity.

Employees have a contractual claim, one that is above shareholders and most other creditors, nothing more nothing less.

By all accounts they are being made whole, and can go off and get another job.

Employees have no more of a right to sell their labor to red lobster than any other of their suppliers has a right to sell their products.

Ultimately a company exists, and should exist, solely for it's shareholders. Anything else leads to waste, grift and mismanagement.

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