Angry that your favorite Red Lobster is closing? The magic of Wall Street has a lot to do with it.
red lobster It is the largest casual dining restaurant business in the United States, serving 64 million customers annually at nearly 600 locations in 44 states and Canada. Filed for bankruptcy on May 19 The closure of nearly 100 locations across the country has devastated scores of fans and 36,000 staff. The chain is iconic enough to be featured in a Beyoncé song.
Placing blame for corporate failure can be tricky. But some analysts say the root cause lies in Red Lobster’s Dilemma no Endless shrimp promotions Some people blame this. Yes, the company’s bankruptcy filing showed it lost $11 million from the shrimp incident and suffered from inflation and rising labor costs. But the bigger culprit for the company’s problems is the financing techniques favored by a powerful force in the financial industry: private equity.
The technique, commonly known as divestment, was part of the bankruptcies of retail chains like Sears, Mervyn’s and ShopKo, as well as hospital and nursing home businesses like Steward Healthcare and Manor Care. All are owned by private equity firms.
Divestiture occurs when a company’s owners or investors sell some of its assets, benefiting themselves and dipping the company into trouble. This approach is favored by some private equity firms, which acquire companies, provide debt for the acquisition, and hope to sell them to others at a profit within a few years. A common form of divestiture, called a sale-leaseback, involves selling a company’s real estate; this type of deal has put Red Lobster in hot water.
In recent years, private equity firms have made significant investments across a variety of industry sectors, including retailers, restaurants, media and health care. Private equity-backed companies employ about 12 million workers, or 7% of the workforce. Academic research shows that companies that are heavily indebted and acquired by private equity are 10 times more likely to go bankrupt than those that are not acquired by these firms. programme. in a Report This month, Moody’s Ratings said the leveraged buyouts pursued by many private equity firms have led to higher corporate defaults and reduced the amount investors get back when companies restructure.
The sale-leaseback that sank Red Lobster involved the July 2014 sale of prime real estate beneath its 500 stores, which generated $1.5 billion in revenue. But the money doesn’t go back to Red Lobster; instead, it provides capital to private equity firms to buy the chain, Red Lobster’s press release states. The company is San Francisco-based Golden Gate Capital, which has $10 billion in assets.
Golden Gate acquired Red Lobster for $2.1 billion in May 2014, so property sales are critical to financing the company. “Red Lobster is a very strong brand with an unparalleled market position in the seafood casual dining space,” Golden Gate Managing Director Josh Olshansky said in a press release announcing the deal at the time. programme.
The $1.5 billion sale crippled Red Lobster. After the property is sold, Red Lobster will also need to pay rent for the previously owned store, which increases costs significantly. According to the bankruptcy filing, its rental revenue will total $200 million per year by 2023, accounting for about 10% of its revenue.
When asked about the negative impact of the sale/leaseback on Red Lobster, a Golden Gate spokesman declined to comment.
The press release announcing the sale/leaseback stated that the company purchasing the properties, American Realty Capital Partners, got a very good deal. The company described the Red Lobster locations it purchased as “irreplaceable locations” and “prime real estate located at a major crossroads in strong markets,” but noted that the properties sold for “below replacement cost.” Under the terms of the sale, Red Lobster’s rent will also increase regularly by 2 percent annually, the release noted.
American Realty Capital Partners was acquired by Realty Income in 2021.
Selling Red Lobster hurts the company in many ways. First, it means the chain won’t benefit from any uptick in the commercial real estate market. Additionally, the new owner of the property doesn’t appear to be giving Red Lobster a good rental deal. As Red Lobster’s CEO noted in bankruptcy court filings, “a significant portion of the Company’s leases are priced above market value.”
As is typical in private equity buyouts, Golden Gate’s acquisition of Red Lobster significantly increased the chain’s debt, thereby increasing the interest costs it carried. In 2017, independent rating agency Moody’s Ratings lowered Red Lobster’s rating outlook from stable to negative. Moody’s said the chain’s leverage, or debt, was “persistently high.”
“Having a lot of debt and not owning real estate puts companies at a disadvantage,” said senior policy analyst Andrew Park. American Financial Reform Association, a nonprofit, nonpartisan organization that advocates for a stable and ethical financial system. “Red Lobster is yet another example of how private equity can hurt restaurants and retailers in the long term.”
In 2020, Gammon exited its investment in Red Lobster, selling it to Bangkok-based Thai Union Group and an investment group. Thai Union calls itself the “world leader in seafood,” with brands including “Chicken of the Sea” tuna products and “King Oscar” sardines. Terms of the deal were not disclosed.
Regarding the bankruptcy, a spokesperson for the company issued a statement saying, “Thai Union has been a supplier to Red Lobster for more than 30 years and we intend to continue that relationship. We are confident that the court-supervised process will allow Red Lobster to restructure its financial obligations and Realize its long-term potential in a more favorable operating environment.
Robert said bankruptcies of companies like Red Lobster have a multiplier effect on the overall economy and heighten unease among consumers and workers. empireFormer Secretary of Labor under President Bill Clinton.
“One of the reasons people feel so insecure is that behind the scenes, there are a lot of financial games that end up making the rich richer and hurting working- and middle-class Americans,” Reich said in a report. . “All the people who serve Red Lobster, all the people who essentially serve Red Lobster, and the small businesses in the communities that are affected by the massive layoffs, they’re next in line and they’re experiencing the ripple effects.”
Red Lobster employees are bearing the brunt of the closure. One of them is Austin Hurst, the former barbecue chef at Red Lobster in Arizona. He said in an interview that he learned from a friend that his store had closed but had not heard from his manager or anyone higher up in the company. He said he was told his store wasn’t profitable until about three months ago.
“About a month before closing, the district manager came in and said, ‘Yeah, this red lobster looks really bright. You guys are definitely going to stay open,'” Hurst recalled.
Hurst said he was offered a job at another Red Lobster store, but it required a longer commute and cost $17 an hour, down from the $19 he previously made.
Sen. Edward Markey, D-Mass., recently held a hearing on private equity and health care. He also proposed legislation that would require greater transparency from health care entities owned by private equity firms, including disclosure of sale/leaseback arrangements and fees charged by private equity firms and dividends paid to health care entities by health care entities.
“My legislation is very simple,” Markey said in an interview. “To ensure that these financial shenanigans do not have a profound impact on our nation’s communities, the Department of Health and Human Services must determine whether selling the land beneath these hospitals and then leasing the land back to the hospitals does not provide health care services to the communities. have negative impacts.
Markey added that private equity is taking off across all sectors of our economy, but its most profound impact is in health care. “The more private equity gets into the hospital business, the more it becomes a preview of the atrocities that will impact our health care system,” he said.
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