Here's Why Red Lobster's Demise Could Happen Sooner Than You Think

The business practices of Red Lobster's new owner will hasten the restaurant chain's demise.

Jul 2, 2014 at 5:30PM

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Red Lobster's days are numbered. While it was struggling to stay relevant under former owner Darden Restaurants (NYSE:DRI), it now faces a dismal future at the hands of private equity firm Golden Gate Capital.

The reason for this is simple. Despite efforts to characterize things differently, the private equity industry isn't interested in investing in a failing restaurant franchise in a last-ditch attempt to revitalize the brand -- click here to learn more about the history of private equity companies. Golden Gate will instead extract as much cash out of the business as possible in an effort to maximize its own return on investment.

In fact, Golden Gate has already begun doing so. "On the same morning that Darden announced the sale of Red Lobster, Golden Gate Capital announced that it had sold the real estate assets of 500 Red Lobster properties in a sale-leaseback deal with American Realty Capital for $1.5 billion," a recent Fortune article explained.

As a result, "Golden Gate, which stripped Red Lobster's real estate assets and sold them off, arranged to recoup 71% of the total investment before it even took control of the restaurants."

As Motley Fool contributor John Maxfield explains in the video below, the result is that Red Lobster, which has already been struggling with declining same-store sales and profitability, now faces a higher expense base. Needless to say, this probably won't end well for the chain.

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John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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