Comment by habitue
2 years ago
I think the author has a hard time trying to put a "why should we care?" spin on this at the end: Middle class families need a nice night out, and red lobster is the best way to do that!
Totally agree that this is vicious jackal like behavior by the PE funds. But as others have said, this is the lifecycle of a dying company. If red lobster's share prices were high because they were extremely profitable and everyone loved the restaurants:
A) it'd be too expensive for PE to buy up a controlling share
B) The smart move wouldn't be to strip the company for parts, the smart move would be to keep running the business well and soaking up the cashflows
This stuff happens to a limping company and the PEs are the wild dogs picking off the old weak corporations.
I think articles like this are pulling a switcheroo where it gets you to engage your moral indignation emotions and aim them in defense of a corporation. Those emotions are appropriate if we're talking about a human being, but aren't when we talking about a company. Imagine a PE fund doing some equivalent to an elderly person, that would actually be outrage worthy! This is just corporate finance, don't let it get to you.
I wish authors like this would explore the alternative they want.
Do they want Red Lobster to be socialized and run by the government for the public good? Should it be deemed a historic or essential business, with laws to ensure it lasts until the end of time? Do they really think owners shouldn't be able to sell companies they own, or "bust them out" (aka, simply selling off assets for profit).
You have a wonky definition of a dieing company.
If a company makes $X in reveune and has $X - Y (Y<X) in costs that doesn't seem to me like a dieing company. Of course if you use PE to purchase that company and add in $2X in costs then it sounds like a dieing company. However, it was perfectly fine until you came along and strangled it.
The price of RL share prices is pretty irrelevant to whether PE can kill it or not. Honestly the higher the price the better it is. If you can spend $100M to buy a company and gut it for $300M that sounds a lot more attractive then buying 100 $1M companies to gut for $3M a peice.
The company wasn't dying, but it was undervalued on the market. It also sounds like the component parts of the company were more valuable separate than together.
>Honestly the higher the price the better it is.
IF you have to buy at $300M, and can only sell for $100, then higher prices are not better.
A dying company is one that fails to produce enough earnings to justify the assets it consumes or holds.
As an absurdism, if Walmart only made $1 a year in profit we would probably wonder why the hell it takes them millions or billions in inventory and real estate to produce less profit than a child’s lemonade stand.
Red Lobster is like that. It’s not that they’re unprofitable, it’s that their profits don’t justify occupying that much real estate.
A clear cut example would be if locations were making less in profit than other companies were willing to pay in rent. Ie RL would make more money by not being RL anymore.
> The price of RL share prices is pretty irrelevant to whether PE can kill it or not.
The share price isn’t directly relevant, it’s the share price relative to assets. Companies with expensive stocks are usually worth several to many times more than the assets they hold, so buying them out to sell the physical assets is just lighting money on fire.
PE looks for companies where the market either disbelieves in the company so much their stock is worth less than their assets, or companies where the market has undervalued those assets.
B is not true. It's more profitable to extract lots of value in the short term and kill the company and then move on to the next victim, continually showing great profit spikes and cashing out yourself, than to slowly extract value over the years.
The system is full of perverse incentives.
You’re forgetting that we operate in a world of limited resources, and the opportunity cost of poorly allocating those limited resources.
PE are like autotrophs, or literal vultures if you prefer. They recycle poorly allocated resources and return them to the market so that someone else with a better use (read: more profit) can buy them. It’s a niche in the market, like autotrophs.
This probably is the better move for long term profit. Not for the PE company specifically, but for the market as a whole. All those newly freed assets can now be consumed by new companies making more profit.
In theory, this is supposed to benefit everyone (though it doesn’t, for structural reasons). A new company with more profits means more taxes for governments, more profits that can be paid out as wages to workers, and the profits indicate consumers want whatever the new company makes more than RL’s food.
It’s also worth noting that PE is a reflection of market opinion. Companies that the market believes in are worth several to many times the value of their assets. There’s no way to acquire them, gut them for assets and make a profit.
Why is this perverse? It seems desirable. IF there are other opportunities that generate more value, you would want to cash out of the lower ones and invest in the better ones.
IF there are no options that generate better value, the company wont be liquidated.