I’m not going to lie: News of Red Lobster’s bankruptcy hit me pretty hard.
My parents used to take me there for my birthday when I was a kid — not because I liked seafood but simply because I loved the cheddar biscuits.
Now locations are closing across the country and the future of the chain is uncertain.
In its Chapter 11 filing, Red Lobster expressed regret over its “Endless Shrimp” promotion — an all-you-can-eat potpourri of prawns for just $20. The decision to make “Endless Shrimp” a permanent fixture rather than a limited promotion apparently cost the restaurant $11 million in less than a year.
However, the restaurant also said it had between $1 billion and $10 billion in debt. So there’s clearly more to the story.
The shrimp, ladies and gentlemen, are a smoke screen. They’re a ruse meant to distract from the real culprit, which is Red Lobster’s ownership group — Golden Gate Capital and Thai Union.
The Truth About Red Lobster’s Bankruptcy
Golden Gate Capital is a private equity firm that bought Red Lobster from Darden for $2.1 billion in 2014.
Golden Gate sold off the chain’s real estate assets almost as soon as the deal was completed. As a result, many restaurants had to start paying rent — a burden that grew increasingly cumbersome, as traffic and revenue diminished.
Those struggles were most acute during the pandemic, but more recently supply chain issues and inflation contributed further to the decline in business. Join Wealth Daily today for FREE. We’ll keep you on top of all the hottest investment ideas before they hit Wall Street. Become a member today, and get our latest free report: “How to Make Your Fortune in Stocks”The Best Free Investment You’ll Ever Make
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Golden Gate also cut costs to the bone, laying off employees and slashing its marketing budget. And it saddled Red Lobster with hundreds of millions of dollars in debt.
Of course, this is how private equity firms work. The land sale alone fetched $1.5 billion for Golden Gate — recouping roughly 75% of its purchase. Then it feasted on what was left before unloading whatever was left on Thai Union.
Thai Union, the world’s largest seafood supplier and the owner of seafood brands (including Chicken of the Sea), bought a 49% stake in Red Lobster in 2016 at a cost of $575 million. It then bought out the remainder of the company in 2020 with a separate group of partners.
Thus, Golden Gate escaped with its profits leaving Thai Union with a flailing restaurant chain and hundreds of millions in debt. What Thai Union got out of the deal was a reliable consumer for its shrimp.
That is, Red Lobster bought shrimp and other products from Thai Union without taking the supply process, competing bids, or even the company’s demand projections into consideration.
Still, the gambit backfired as Thai Union took a $530 million impairment charge to divest from Red Lobster earlier this year.
Golden Gate Capital, meanwhile, came out ahead — just like it did when pilfered shoe retailer Payless in 2012.
Private Equity and the Retail Apocalypse
Payless generated $322 million in operating profits in the first two years of Golden Gate’s stewardship. However, it paid $352 million in one-time dividends to shareholders — the largest of which was Golden Gate itself.
The shoe chain also had to kick out $83 million in interest payments on the $700 million in debt Golden Gate used to finance the acquisition in the first place. Payless filed for bankruptcy in 2017 and again in 2019 — but that was well after Golden Gate dumped it off on Alden Global Capital, another private equity firm.
Of course, Alden profited, too, employing the familiar playbook of slashing overhead, liquidating inventory, selling off assets, piling on debt, and prioritizing its biggest shareholders. The hedge fund also operated as a secured creditor, placing it toward the front of the line than others for repayment when the inevitable bankruptcy hit.
It’s more than a trend. It’s an ugly and exploitative way of doing business and what some have dubbed “vulture capitalism” or the “retail apocalypse.”
Indeed, one study conducted by California Polytechnic State University, found that 20% of large companies acquired through leveraged buyouts (LBOs) go bankrupt within 10 years, compared with a control group’s bankruptcy rate of 2%.
And 10 of the 14 largest retail chain bankruptcies since 2012 were at private equity-acquired chains — Toys R Us being one of the most notable.
The LBO practice is reportedly responsible for more than 1.3 million job losses in general, and roughly 600,000 job losses in the retail sector, alone. No doubt, the retail sector is typically more vulnerable, with 41% of leveraged buyouts leading to bankruptcy from 1980–1995, and 23% between 1996 and 2007.
However, nursing homes have also proven to be a juicy (if insidious) target.
That was evidenced by Carlyle’s now infamous bust-out of HCR ManorCare in 2007. Carlyle acquired the assisted living company for more than $6 billion, immediately selling off its real estate and recouping its investment.
It also extracted over $80 million in transaction and advisory fees from the company and instituted vicious cost-cutting programs, laying off hundreds of workers and eroding the quality of its facilities’ care.
In 2018, ManorCare filed for bankruptcy, with over $7 billion in debt, but Carlyle came out ahead.
Publishing is another industry that’s being hollowed out by private equity, as the percentage of newspapers owned by PE firms rose from 5% 2001 to 23% in 2019.
So don’t be fooled by the headlines surrounding Red Lobster’s bankruptcy.
In truth, the chain is just another victim of private equity’s shell game.
Fight on, Jason Simpkins Simpkins is the founder and editor of Secret Stock Files, an investment service that focuses on companies with assets — tangible resources and products that can hold and appreciate in value. He covers mining companies, energy companies, defense contractors, dividend payers, commodities, staples, legacies and more… In 2023 he joined The Wealth Advisory team as a defense market analyst where he reviews and recommends new military and government opportunities that come across his radar, especially those that spin-off healthy, growing income streams. For more on Jason, check out his editor’s page. Be sure to visit our Angel Investment Research channel on YouTube and tune into Jason’s podcasts. Want to hear more from Jason? Sign up to receive emails directly from him ranging from market commentaries to opportunities that he has his eye on. 
