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Red Lobster has become the latest victim of private equity funds’ version of “slash and burn agriculture.” While the ploy Golden Gate Capital pulled off to enrich its stakeholders to the demise of Red Lobster is nothing original or recently invented, owners of privately held corporations or publicly traded companies continue to fail to learn the lesson.
As private equity firms continue to show interest in the gambling space, Red Lobster provides yet another reminder of how short-sighted decisions perpetuate this cycle. That cycle always ends with the destruction of the entity that firms buy into.
How Golden Gate Capital exploited Red Lobster to enrich its partners
It was not endless shrimp that decimated Red Lobster; it was endless greed. In 2014, Darden Restaurants sold Red Lobster to Golden Gate Capital for $2.1 billion. While Golden Gate at that time insisted it was “charting a new course as an independent company,” according to Erin McDowell of Business Insider, the reality is that Golden Gate’s heading for that course was directly into the rocks.
To pay for the acquisition, Golden Gate sold off the land that Red Lobster’s restaurants occupied to a separate company. That accomplished two things: it meant that Golden Gate partners had minimal, if not zero, risk in the transaction and also increased each restaurant’s overhead by adding lease payments.
Golden Gate followed the private equity script to a tee from there. To somewhat account for the increased overhead, Golden Gate cut staff and started using lower-quality food ingredients, thus significantly worsening the customer experience. Golden Gate then made its exit during the first year of the COVID-19 pandemic, when its billions of dollars of resources could have helped Red Lobster navigate the crisis.
Red Lobster files for bankruptcy
The inevitable crash finally came Monday, with Red Lobster filing for bankruptcy. Thus, a restaurant chain that endured successfully for nearly five decades and brought the beloved Cheddar Bay Biscuits to the world was sold off for parts in about a fifth of that time.
In the wake of the destruction, hundreds of people have lost their jobs, and communities have lost the economic impact of those livelihoods. Hundreds more will meet the same fate during the bankruptcy proceedings.
You could take the story’s details and replace Red Lobster with the name of myriad entities that went from cultural institutions to wastelands in a matter of years because private equity funds scheduled them for termination. Despite the prevalence of this narrative, history repeats itself because people refuse to learn from it.
Private equity turns hunt toward the online gambling industry
In the search for their next victims, some private equity firms are starting to sniff out companies that offer online gambling products in the United States. For example, Standard General has a bid on the table for Bally’s, which another investment firm (K&F Growth Capital) characterized as a serious undervaluation of the company.
Other private equity funds have recently kicked the tires or tried to get into the business. For instance, Apollo Global Management was a rumored contender to acquire International Game Technology’s (NYSE: IGT) global gaming division in 2023.
Amid these circumstances, and others to follow, the lessons are clear for the gaming industry. The lure of a quick buck often hides an exponential cost that must be paid eventually. The catch is that the people standing to make the quick buck and the people who will ultimately pay the price are not the same groups.
What online gambling company investors can learn from Red Lobster
Golden Gate might have drawn up the execution warrant for Red Lobster, but Darden Restaurants signed it. Drawn in by the lure of a $2.1 billion, quick and easy escape from dealing with Red Lobster’s issues by Golden Gate, Darden betrayed the futures of the thousands of workers across the world who had toiled to build Red Lobster up to where it drew that price.
Standard General’s bid for Bally’s (NYSE: BALY) has some of the same elements. For example, Standard General stated that it “would allow the Company’s stockholders to immediately realize a premium price, in cash, for their investment.”
While Bally’s has formed a special committee to evaluate the offer, Standard General has not publicly shared its vaguest plans to invest in Bally’s beyond the acquisition cost. Such details could be forthcoming later if the committee recommends shareholders approve the takeover.
In that event, and similar situations with other online gambling companies in the future, it’s crucial that shareholders view private equity firms’ promises with a high level of skepticism. As companies like Bally’s move closer to actual profitability with their online gaming divisions, predators like Golden Gate will catch their scent.
However, rejecting these offers could require such shareholders to refrain from participating in the all-you-can-greed buffet. If the COVID-19 pandemic proved the truth of any facet of US society, it’s that counting on people to simply think about how their decisions might affect others is a fool’s errand.
