Blood Sucker Economy
21st May 2024
ZMan peers behind the curtain.
Last week brought news that the iconic restaurant chain Red Lobster has filed for bankruptcy protection and has started closing locations. The chain is mostly known for being a cheap night out for people in the suburbs and businessmen stuck near a suburban business park. The people hired to write about business for regime media, people who know nothing about business, have rolled with the usual lines about how casual dining was devastated by the pandemic.
The joke online is that Red Lobster’s all you can eat shrimp deal cost them millions because diversity would sit there for hours eating shrimp. The restaurant admits it was a disaster for them, but the real reason the chain has failed is that it was taken over by gangsters who made it into a bust-out. The gangsters in this case are private equity investors who bought up the chain. This bankruptcy is part of fleecing the dumb money that still remains trapped in the enterprise.
The way these scams work is the private investors swoop in and buy a property that is asset rich but cash poor. That is, they have things of value, but those things are not generating enough revenue to meet expenses. Sometimes the enterprise is profitable but needs cash to expand or maybe reorganize itself to shed poorly performing assets and expand into more profitable areas. Private equity comes in with attractive terms and an army of experts to reshape the enterprise.
In reality, they usually sell the assets in deals that have the buyer lease back the asset to the company in order to raise quick cash. Other times the asset is pledged as collateral in a similar sort of debt arrangement. The result is the enterprise quickly raises cash to pay the investors with a healthy profit but is left stripped of its assets and often holding a lot of debt. This is what happened here. The new investors sold the real estate in lease-back deals that are now expiring.