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PaperclipPerfector  6mo ago (text post)   27724 thread views

Culture War Roundup for the week of May 13, 2024

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McDonald’s is in part a ‘real estate’ business because of its franchising system, wherein it acts as landlord to franchisees. McDonald’s therefore both makes money the usual way franchised restaurants do and on rent for those same franchise owners.

Red Lobster was not franchised. When it was sold in 2014, every single Red Lobster restaurant was owned and operated by the company itself. From an article from the time:

…Golden Gate, which bought the chain for $2.1 billion in 2014. At that time, virtually all of the real estate under Red Lobster restaurants was owned by the chain, which has no franchisees.

McDonald’s’ model isn’t typically attempted by most modern restaurant chains, even those that do franchise, because shareholders tend to prefer that excess profits are reinvested in growth or returned to them rather than used to buy commercial real estate which the investors could buy exposure to themselves to the extent that they want to.

Looks like the private equity is the “real estate company” and Red Lobster is the leaser*

https://www.businessinsider.com/red-lobster-endless-shrimp-bankruptcy-private-equity-debt-real-estate-2024-5

In 2014, amid flagging sales and pressure from investors, Darden sold Red Lobster for $2.1 billion to Golden Gate Capital, a San Francisco private-equity firm. To raise enough cash to make the deal happen, Golden Gate sold off Red Lobster's real estate to another entity — in this case, a company called American Realty Capital Properties — and then immediately leased the restaurants back

"The thing that private equity does is just unload assets and monetize assets. And so they effectively paid for the purchase of Red Lobster by selling the real estate," he said. "It'll probably be fine, generally, but there's going to come a time in which your sales fall, your profitability is challenged, and your debt looks too bad, and then suddenly those leases are going to look awfully ugly."

"Once they sell the real estate, then the private-equity company is golden, and they've made their money back and probably more than what they paid," she said, noting that this was a common theme in other restaurants and retailers and adding: "The retail apocalypse is all about having your real estate sold out from under you so that you have to pay the rent in good times and in bad."

Yeah, but the whole reason this approach is even viable is because when Red Lobster was both real estate company and restaurant operator, investors valued it at less than the sum of its parts. Since the late 1980s conglomerates have fallen out of fashion because asset managers of all kinds prefer to deal with pure play companies (especially outside big tech) and to handle allocation themselves. The big Japanese conglomerates often trade at very poor multiples compared to Western businesses not only because of the state of the Japanese economy but because when you buy into one you’re buying into like 15 arbitrary and often barely related business areas. By contrast in the American equity market an investor can more easily measure and tailor their exposure to real estate, oil, railroads, video games, b2b SaaS and so on. Those looking for a preset diversified portfolio can buy an index or buy big holding companies like Berkshire or the public PE firms that have exposure to many different kinds of business.

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