You probably saw the hilarious critique of The Olive Garden that made the rounds last week; the hedge fund behind that critique is a major shareholder with a long history of shady financial deals that gut profitable businesses, destroy jobs, and line the pockets of short-term "investors."
Starboard Value previously pulled the stunt with Red Lobster, selling the real-estate out from under 500 restaurants to a "real estate investment trust," freeing $1.5B for dividends to investors like Starboard, leaving Red Lobster limping along paying rent in the locations it had previously owned, profits cut in half -- after Starboard had milked it for its giant, one-time payout.
This is a common hedge-fund scam: it's what killed Mervyn's, costing 30,000 jobs after the business's hedge-fund owner sold the stores' property out from under it, breaking the business's back on rent payments for property that it had once owned (the hedge fund cleaned up from the real-estate sale).
The Mervyn’s case reveals the key problem with the sale-leaseback scheme. “The reason these companies own their real estate is because they’re a buffer in times of recession,” Eileen Appelbaum said. Restaurants and retail stores are highly cyclical; new clothes and nice dinners are the type of expenses that consumers immediately cut during tough times. If these stores don’t have to pay rent, they can better weather the downturns, which inevitably come with the business cycle. “Strip them of the buffer and you put them at risk,” Appelbaum concluded.
Olive Garden and Red Lobster may not be destinations for hipster Internet journalists, and they have seen revenue declines amid stagnant middle-class wages and increased competition. But they are still profitable businesses. Thousands of Americans work there. Why should they be bled dry by predatory investors in the name of “shareholder value”? What of the value of worker productivity instead of the financial engineers?
Not salting your pasta water may be scandalous. But the real scandal here is what this hedge fund wants to pull off, which can only be called legalized theft.
(via Making Light)
(Image: "Olive Garden", Mike Mozart, CC-BY)