Elon Musk: Always A Douche

[crazy canuck]

Most PE arrangements are fairly short term placements of cash in which the investors want the returns and cash out.  Five year terms are typical, some can longer.

So the who purpose of PE is one of two things.  Get in and strip all the value or make the company look pretty to sell to some sucker at an inflated price.

Red Lobster was the former.

These are not Warren Buffet buy and hold types.

There are also other attributes that can attract a PE buyer, for example a loss-making company may be purchased for the value of its tax attributes (e.g. net operating losses) - once those are harvested, the company can be killed off.  Back in the oughts, when retailers first were getting slammed, there was a spate of PE acquisitions where the PE firm would detach the owned real estate, declare an extraordinary dividend to drain whatever cash was left in the operations, and then file the company for bankruptcy.

Yep, then they directed their new found skills to stripping out the value of viable businesses.  Profits were even better.

[Tonitrus]

Is that sort of behavior helpful economically?

I am sure someone could justify it as such (true or not).

"Provides incentives for all companies to be more fiscally responsible and/or competitive in a fast-paced, fluid economic marketplace!"

[grumbler]

The companies that bought the RL building and repurposed them for more lucrative business benefited, as did their shareholders.

There are obviously economic activity that is fraudulent and thus benefits no one, but PE buyers are not forcing the sellers to sell.  Golden Gate paid something like $2 billion for Red Lobster, which is obviously more than the seller thought it was worth, and less than Golden Gate thought it was worth.  That's just how markets work.

[Sheilbh]

Is that sort of behavior helpful economically?

I'd struggle to say what, if any, benefits there are from PE to the wider economy. Perhaps, at best, they can sponsor a management buy-out and separation of a better company maybe. They can maybe help inject capital into a company that should be doing better in its market. But I'd really struggle to say there's a wider economic benefit to traditional PE.

I think there's lots of benefits (and some problems) with, say, VC which has a similar structure.

[Admiral Yi]

Is that sort of behavior helpful economically?

It frees underperforming capital for more productive purposes.

[Valmy]

The companies that bought the RL building and repurposed them for more lucrative business benefited, as did their shareholders.

There are obviously economic activity that is fraudulent and thus benefits no one, but PE buyers are not forcing the sellers to sell.  Golden Gate paid something like $2 billion for Red Lobster, which is obviously more than the seller thought it was worth, and less than Golden Gate thought it was worth.  That's just how markets work.

That's not the question. Sure some asshole will make some money, but the question is what economic benefits that brings. Does markets working always bring rational economic benefit? Nobody was forcing people to buy Mortgaged backed securities either. Markets were working fine. I am not sure how destroying the world economy brought economic benefit. Nor do I see how destroying all these healthy companies providing wanted goods and services provides much economic benefit.

Is that sort of behavior helpful economically?

It frees underperforming capital for more productive purposes.

Sure dude. Sure it does. More productive at what? Destroying other industries?

[Admiral Yi]

Sure dude. Sure it does. More productive at what? Destroying other industries?

Generating return on investment.  Dude.

[Tonitrus]

Is that sort of behavior helpful economically?

It frees underperforming capital for more productive purposes.

Of course...the argument of Vikings, pirates, and bank robbers across the centuries. 

[dane]

https://m.youtube.com/watch?si=lYPDaTB2sn4NO5wX&v=oDJWD7021HI&feature=youtu.be

26:44

This video is not available in my country.

One example from the video is that RL had owned the land most of its stores were built on. Golden Gate Capital  immediately sold the land, then leased it back to RL, for around $120 million per year. For reference, the total debt RL had accrued when it filed for bankruptcy was around $300 million.

[grumbler]

That's not the question. Sure some asshole will make some money, but the question is what economic benefits that brings. Does markets working always bring rational economic benefit? Nobody was forcing people to buy Mortgaged backed securities either. Markets were working fine. I am not sure how destroying the world economy brought economic benefit. Nor do I see how destroying all these healthy companies providing wanted goods and services provides much economic benefit.

Non sequitur.  There is nothing inherently wrong with mortgage-backed securities and billions of dollars are invested in them today.  The world economy doesn't seem to have been destroyed, as it exists to this day.

The argument that RL was a "healthy company" seems unfounded given that it was sold to Golden Gate after years of losses.  GG saw more value in the business than its original owners, so it offered more than the original owners thought that it was worth and less than GG thought that it was worth.  There's nothing magical about existing companies that justifies preserving them a priori.  The persistence of market incumbents hampers the ability of new startups to enter the market.

[grumbler]

One example from the video is that RL had owned the land most of its stores were built on. Golden Gate Capital  immediately sold the land, then leased it back to RL, for around $120 million per year. For reference, the total debt RL had accrued when it filed for bankruptcy was around $300 million.

It is worth noting that Golden gate sold RL four years before RL went bankrupt.  I'm not sure why the blame for its bankruptcy is assigned to a company that hadn't owned it for years, other than it makes a better story if the story can feature EVOL PE in the villains role.

[Admiral Yi]

One example from the video is that RL had owned the land most of its stores were built on. Golden Gate Capital  immediately sold the land, then leased it back to RL, for around $120 million per year. For reference, the total debt RL had accrued when it filed for bankruptcy was around $300 million.

Thanks.

The question I asked Hillary was how do we know they intended to bankrupt Red Lobster?  People here have mentioned the land sale and the debt load.  Do these two things prove Golden Gate intended to bankrupt?  Do all leveraged takeovers and/or asset strips result in bankruptcy? 

Golden Gate sold Red Lobster to Thai Union (which owns Chicken of the Sea incidentally!!).  That means Thai Union thought Red Lobster had some positive value.  So even if Golden Gate gave it their very best effort to bankrupt Red Lobster, they failed.

FYI the numbers I got from an NBC story were $2.1 billion paid by Golden Gate to acquire Red Lobster, $1.5 billion realized from sale of land.

[The Minsky Moment]

Is that sort of behavior helpful economically?

Some of it is just regulatory arbitrage - taking advantage of differential tax treatment of different kinds of assets, exploiting the benefits of the bankruptcy regime, or exploiting weaknesses or loopholes in state fraudulent conveyance law.

For example, Real Estate Investment Trusts (REIT) receive favorable tax treatment under federal law. In the specific example of Red Lobster, Golden Gate exploited that fact to sell off all the owned real estate into a REIT structure; they then sold a 49% stake to the shrimp company, returning all the money they invested and still leaving a 51% stake. 

Was there any real economic impact from all this dealmaking?  Nothing other some wastage in transactions fees.  The restaurants still remained in place, functioning the same as before, only now they paid rent on properties they formerly owned. The problem is that the restaurants struggled to stay profitable now that their operating costs were higher.  One could argue that proves that there were higher and better uses for the real estate - except that there weren't.  The REIT not only kept the Red Lobsters on as tenants, the supposed stability that offered was a key selling point for the REIT. Even now, in bankruptcy, the plan is to keep as many restaurants on as possible, because the market for commercial real estate is still soft nationwide.  From the point of view of the overall economy, it would have been better if none of the deals ever happened.

[The Minsky Moment]

Golden Gate sold Red Lobster to Thai Union (which owns Chicken of the Sea incidentally!!).  That means Thai Union thought Red Lobster had some positive value.  So even if Golden Gate gave it their very best effort to bankrupt Red Lobster, they failed.

It means that they thought that the value of Red Lobster + the value of their exclusive supply contracts was positive.  The former could be negative if the latter was positive enough.

It's hard to say further without knowing how much Thai Union paid for the 51% stake in 2020.

[crazy canuck]

Sure dude. Sure it does. More productive at what? Destroying other industries?

Generating return on investment.  Dude.

The point being that it is not always good for the economic wellbeing of society as a whole.  This is not about creating an environment in which productive companies thrive.  It is about the concentration of wealth in the hands of unproductive corporate raiders.

As Valmy pointed out, we have been warned about this for decades, but anti regulation types who rely on the simplistic mantras you often quote here, won the day.