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How private equity rolled Red Lobster

Disappointed about the closure of your beloved Red Lobster? Financial maneuvers on Wall Street played a significant role.

Red Lobster, once the largest casual dining chain in the US, served 64 million customers annually across nearly 600 locations spanning 44 states and Canada. However, its bankruptcy filing on May 19 and subsequent closure of almost 100 outlets nationwide have left its legion of fans and 36,000 employees in despair. The chain’s cultural impact is profound enough to have been referenced in a Beyoncé song.

While assigning blame for corporate failures is complex, some analysts argue that Red Lobster’s downfall wasn’t solely due to its infamous endless shrimp promotions. Despite losing $11 million from this venture, as indicated in its bankruptcy filing, the company’s woes were exacerbated by inflation, rising labor costs, and a financing tactic favored by a powerful financial entity known as private equity.

This tactic, often referred to as asset-stripping, has been implicated in the demise of various retail chains such as Sears, Mervyn’s, and ShopKo, as well as bankruptcies involving hospital and nursing home operations like Steward Healthcare and Manor Care, all of which were previously owned by private equity firms.

Asset-stripping involves an owner or investor selling off a company’s assets, reaping the rewards, and impairing the company’s operations. Private equity firms typically employ this strategy after acquiring companies, burdening them with debt to finance the purchase and aiming to sell them at a profit within a few years. One common form of asset-stripping is a sale/leaseback, which entails selling a company’s real estate. This maneuver played a pivotal role in Red Lobster’s downfall.

In 2014, Red Lobster sold premium real estate under 500 of its stores for $1.5 billion. However, instead of reinvesting this capital into the chain, it went to the private equity firm that owned Red Lobster at the time, San Francisco-based Golden Gate Capital, which held $10 billion in assets.

The sale/leaseback deal significantly increased Red Lobster’s operating costs. With the real estate sold, the company had to pay rent for stores it previously owned, amounting to $200 million annually or roughly 10% of its revenues by 2023, as per its bankruptcy filing.

The ripple effects of Red Lobster’s bankruptcy extend beyond its closure, impacting employees like Austin Hurst, a former grill master at a Red Lobster outlet in Arizona. Hurst, like many others, faces uncertain employment prospects and reduced wages.

Sen. Edward Markey, a Democrat from Massachusetts, has highlighted the broader implications of private equity in various sectors, including health care. His proposed legislation aims to increase transparency regarding private-equity-owned entities’ financial practices, particularly in the health care industry, where such maneuvers could have profound consequences for communities nationwide.

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