6 ms·

I am sure you heard of red lobster going bankrupt because of endless shrimp. Well, that wasnt actually the case but once again private equity. They forced red

I am sure you heard of red lobster going bankrupt because of endless shrimp. Well, that wasnt actually the case but once again private equity. They forced red lobster to sell off their land/buildings to a PE controlled entity. Which rented it back to them. Also forced them to go to a specific, PE controlled, fish seller. In fact, they got forced into starting the endless shrimp stuff because that seller had too much shrimp. And for the privilege to be managed by them, the bought companies get forced to take on the debt that PE took on to buy them in the first place, along with paying an outrageous amount of money every month. And lets not even get into what they do to elderly homes..

neom 2y ago
Darden group sold Red Lobster to GGC because it was massively underperforming in it's portfolio due to mismanagement through the 90s. GGC wasn't able to make much headway with it, and so it sold 25% to a vendor on the supply chain as part of debt restructuring and forgiveness, that allowed them to get some unit economics back into reality and the owner of the supply chain company took the rest of the position to continue the work of re-building the supply chain. Should the PE firm have involved the vendors in that way, maybe not, however it seems it was a decent enough strategy in terms of thoughtfulness. Red Lobster had a death rattle long before PE got involved, PE is just a convenient story.
- ImPostingOnHN 2y ago
  McDonald's, a non-failing firm, not owned by PE, was once described by a former CFO thusly: "We are not technically in the food business. We are in the real estate business." They realised that owning the land upon which their restaurants, allowed them to succeed. Red Lobster's PE firm, on the other hand, did the exact opposite: sold the most valuable asset out from under their restaraunts, to another PE firm, which then squeezed the restaraunts on rent and ruined their store economics (along with the aforementioned supplier further ruining their unit economics) until they went out of business.
  - neom 2y ago
    They're in Chapter 11, they're not out of business yet. Why do you think that is what happened? It doesn't seem to be in line with what GGC told their LPs, so I'm curious where you get your interpretation of the events from? Do you have any links or reading you could provide me with?
    - ImPostingOnHN 2y ago
      >Why do you think that is what happened? The reason I think that is what happened is because that is what happened. Here are some links, as requested: How a bad real estate deal sunk Red Lobster [0] When a private-equity firm bought the iconic seafood chain in 2014, it sold the real estate under the restaurants for $1.5 billion. Then the restaurants struggled to pay the rents [1] It Was A Bad Real Estate Deal, Not A Bad Meal Deal That Killed Red Lobster [2] Ultimate Endless Real Estate Costs at Red Lobster [3] Golden Gate crippled Red Lobster by selling off one of its most valuable assets, the real estate it owned [4] To help fund the deal, Red Lobster spun off its real estate assets in a transaction known as a sale leaseback agreement. Red Lobster had long owned its own real estate but would now be paying rent to lease its restaurants. Sale leasebacks are very common in the restaurant industry, but the arrangement wound up hurting Red Lobster because it became stuck with leases it no longer could afford to pay. [5] But again, it wasn’t because of the shrimp. Following the sale of Red Lobster to Golden Gate, the chain’s real estate assets were also sold off, which meant that the restaurants now had to pay rent on these locations to their parent company. As such, the company was stuck in leases for underperforming restaurants that it couldn’t afford [6] 0: https://www.restaurantdive.com/news/bad-real-estate-deal-sunk-red-lobster/718267/ https://www.restaurantdive.com/news/bad-real-estate-deal-sun... 1: https://www.nbcnews.com/business/consumer/private-equity-rolled-red-lobster-rcna153397 https://www.nbcnews.com/business/consumer/private-equity-rol... 2: https://finance.yahoo.com/news/bad-real-estate-deal-not-173015627.html https://finance.yahoo.com/news/bad-real-estate-deal-not-1730... 3: https://artofprocurement.com/supply/ultimate-endless-real-estate-costs-at-red-lobster/ https://artofprocurement.com/supply/ultimate-endless-real-es... 4: https://prospect.org/economy/2024-05-22-raiding-red-lobster/ https://prospect.org/economy/2024-05-22-raiding-red-lobster/ 5: https://www.cnn.com/2024/05/03/food/red-lobster-seafood-restaurant-bankruptcy/index.html https://www.cnn.com/2024/05/03/food/red-lobster-seafood-rest... 6: https://www.eater.com/24160929/red-lobster-bankruptcy-endless-shrimp-closing-locations https://www.eater.com/24160929/red-lobster-bankruptcy-endles...
- ghaff 2y ago
  A lot of the time, private equity (like MBAs etc.) is a convenient bogeyman for why crappy underperforming companies are crappy and underperforming. But private equity often gets involved because they are crappy and underperforming (or are just in a line of business that doesn't have good prospects any longer).
  - mapt 2y ago
    A small fraction of the time, private equity is brought in to make an ailing, breakeven business profitable. Much more often, it's to bite off limbs until it dies, feasting on cashflow and assets. And then the third portion of the time, the business is generating reliable, modest long-term returns, a "blue-chip" company. Private equity doubles down on future growth that is not projected, gets the company into debt to the owners, makes it worthless, compensate themselves in stock with bank leverage, issues themselves further priority stock, files bankruptcy to get rid of the pensions, and on, and on, and on with various tricks to sack whatever assets the have on their books and whatever cashflow was generating a reliable 5% return before private equity got involved.
    - JumpCrisscross 2y ago
      > Much more often, it's to bite off limbs until it dies, feasting on cashflow and assets This can be a legitimate strategy. I know someone who made millions buying yellow pages companies and managing them for de-growth.
      - ghaff 2y ago
        Eastman Kodak is a good example. Fujifilm arguably sort of came out the other side but much smaller company in much different country. B&M retail, especially in the traditional department store sense, is much reduced. Could Sears have become Amazon (presumably including AWS)? I guess. Would anyone to a first approximation who was employed at Sears still be there? Probably not. Would Sears as it existed have brought any particular assets or expertise to the table? Probably not. At some point, reinvention is sort of pointless because it means bringing along a lot of baggage that has net negative value.
- gamblor956 2y ago
  That's a fair bit of revisionist history trying to make PE look like it's not the bad guy. Red Lobster was flourishing in the 1990s; it was one of the most popular sit-down chains back then. There were lines around the block at most locations. In 2013, Darden Restaurants decided to spin-off Red Lobster and Olive Garden by selling them to a PE firm which coveted the ability to exploit these profitable chains. (Average EPS was approximately $0.77/share, and Red Lobster remained the countries' most popular seafood chain until COVID.) The sale to the PE firm GGC included a sale-leaseback of all of Red Lobster's real estate. The purpose of this was to fund the acquisition, since PE never puts its own money down; it funds acquisitions with the assets of the acquired company. Red Lobster's operating expenses jumped more than 50% overnight, as it now had to pay rent on locations it used to own. Within 2 years, this PE-driven cash grab had Red Lobster on the verge of bankruptcy. Selling Red Lobster to its biggest supplier didn't fix things because the problem was that PE had the bright idea to ruin the company through the sale-leaseback arrangement. PE was not just a convenient story, they are the cause for Red Lobster's demise.

neom 2y ago

Darden group sold Red Lobster to GGC because it was massively underperforming in it's portfolio due to mismanagement through the 90s. GGC wasn't able to make much headway with it, and so it sold 25% to a vendor on the supply chain as part of debt restructuring and forgiveness, that allowed them to get some unit economics back into reality and the owner of the supply chain company took the rest of the position to continue the work of re-building the supply chain. Should the PE firm have involved the vendors in that way, maybe not, however it seems it was a decent enough strategy in terms of thoughtfulness. Red Lobster had a death rattle long before PE got involved, PE is just a convenient story.

ImPostingOnHN 2y ago
McDonald's, a non-failing firm, not owned by PE, was once described by a former CFO thusly: "We are not technically in the food business. We are in the real estate business." They realised that owning the land upon which their restaurants, allowed them to succeed. Red Lobster's PE firm, on the other hand, did the exact opposite: sold the most valuable asset out from under their restaraunts, to another PE firm, which then squeezed the restaraunts on rent and ruined their store economics (along with the aforementioned supplier further ruining their unit economics) until they went out of business.
- neom 2y ago
  They're in Chapter 11, they're not out of business yet. Why do you think that is what happened? It doesn't seem to be in line with what GGC told their LPs, so I'm curious where you get your interpretation of the events from? Do you have any links or reading you could provide me with?
  - ImPostingOnHN 2y ago
    >Why do you think that is what happened? The reason I think that is what happened is because that is what happened. Here are some links, as requested: How a bad real estate deal sunk Red Lobster [0] When a private-equity firm bought the iconic seafood chain in 2014, it sold the real estate under the restaurants for $1.5 billion. Then the restaurants struggled to pay the rents [1] It Was A Bad Real Estate Deal, Not A Bad Meal Deal That Killed Red Lobster [2] Ultimate Endless Real Estate Costs at Red Lobster [3] Golden Gate crippled Red Lobster by selling off one of its most valuable assets, the real estate it owned [4] To help fund the deal, Red Lobster spun off its real estate assets in a transaction known as a sale leaseback agreement. Red Lobster had long owned its own real estate but would now be paying rent to lease its restaurants. Sale leasebacks are very common in the restaurant industry, but the arrangement wound up hurting Red Lobster because it became stuck with leases it no longer could afford to pay. [5] But again, it wasn’t because of the shrimp. Following the sale of Red Lobster to Golden Gate, the chain’s real estate assets were also sold off, which meant that the restaurants now had to pay rent on these locations to their parent company. As such, the company was stuck in leases for underperforming restaurants that it couldn’t afford [6] 0: https://www.restaurantdive.com/news/bad-real-estate-deal-sunk-red-lobster/718267/ https://www.restaurantdive.com/news/bad-real-estate-deal-sun... 1: https://www.nbcnews.com/business/consumer/private-equity-rolled-red-lobster-rcna153397 https://www.nbcnews.com/business/consumer/private-equity-rol... 2: https://finance.yahoo.com/news/bad-real-estate-deal-not-173015627.html https://finance.yahoo.com/news/bad-real-estate-deal-not-1730... 3: https://artofprocurement.com/supply/ultimate-endless-real-estate-costs-at-red-lobster/ https://artofprocurement.com/supply/ultimate-endless-real-es... 4: https://prospect.org/economy/2024-05-22-raiding-red-lobster/ https://prospect.org/economy/2024-05-22-raiding-red-lobster/ 5: https://www.cnn.com/2024/05/03/food/red-lobster-seafood-restaurant-bankruptcy/index.html https://www.cnn.com/2024/05/03/food/red-lobster-seafood-rest... 6: https://www.eater.com/24160929/red-lobster-bankruptcy-endless-shrimp-closing-locations https://www.eater.com/24160929/red-lobster-bankruptcy-endles...
ghaff 2y ago
A lot of the time, private equity (like MBAs etc.) is a convenient bogeyman for why crappy underperforming companies are crappy and underperforming. But private equity often gets involved because they are crappy and underperforming (or are just in a line of business that doesn't have good prospects any longer).
- mapt 2y ago
  A small fraction of the time, private equity is brought in to make an ailing, breakeven business profitable. Much more often, it's to bite off limbs until it dies, feasting on cashflow and assets. And then the third portion of the time, the business is generating reliable, modest long-term returns, a "blue-chip" company. Private equity doubles down on future growth that is not projected, gets the company into debt to the owners, makes it worthless, compensate themselves in stock with bank leverage, issues themselves further priority stock, files bankruptcy to get rid of the pensions, and on, and on, and on with various tricks to sack whatever assets the have on their books and whatever cashflow was generating a reliable 5% return before private equity got involved.
  - JumpCrisscross 2y ago
    > Much more often, it's to bite off limbs until it dies, feasting on cashflow and assets This can be a legitimate strategy. I know someone who made millions buying yellow pages companies and managing them for de-growth.
    - ghaff 2y ago
      Eastman Kodak is a good example. Fujifilm arguably sort of came out the other side but much smaller company in much different country. B&M retail, especially in the traditional department store sense, is much reduced. Could Sears have become Amazon (presumably including AWS)? I guess. Would anyone to a first approximation who was employed at Sears still be there? Probably not. Would Sears as it existed have brought any particular assets or expertise to the table? Probably not. At some point, reinvention is sort of pointless because it means bringing along a lot of baggage that has net negative value.
gamblor956 2y ago
That's a fair bit of revisionist history trying to make PE look like it's not the bad guy. Red Lobster was flourishing in the 1990s; it was one of the most popular sit-down chains back then. There were lines around the block at most locations. In 2013, Darden Restaurants decided to spin-off Red Lobster and Olive Garden by selling them to a PE firm which coveted the ability to exploit these profitable chains. (Average EPS was approximately $0.77/share, and Red Lobster remained the countries' most popular seafood chain until COVID.) The sale to the PE firm GGC included a sale-leaseback of all of Red Lobster's real estate. The purpose of this was to fund the acquisition, since PE never puts its own money down; it funds acquisitions with the assets of the acquired company. Red Lobster's operating expenses jumped more than 50% overnight, as it now had to pay rent on locations it used to own. Within 2 years, this PE-driven cash grab had Red Lobster on the verge of bankruptcy. Selling Red Lobster to its biggest supplier didn't fix things because the problem was that PE had the bright idea to ruin the company through the sale-leaseback arrangement. PE was not just a convenient story, they are the cause for Red Lobster's demise.