Private-equity company Golden Gate Capital, which recently purchased Red Lobster from Darden Restaurants for US$2.1B, says it sees long-term value and growth prospects in restaurant chain despite its declining sales

Nevin Barich

ORLANDO, Florida , June 4, 2014 (Orlando Sentinel) – The private-equity company buying Red Lobster has $12 billion invested in a broad portfolio that includes tech companies, clothing stores, window makers and other restaurant chains.

San Francisco-based Golden Gate Capital said it sees long-term value and growth prospects in Red Lobster, despite its declining sales. Orlando-based Darden Restaurants is selling the struggling seafood chain for $2.1 billion in a transaction that should close by August.

Private-equity companies in general have been snapping up retail and restaurant companies -- newer brands with growth potential and older, floundering ones. Typically, they sell the chains or take them public a few years later.

Even if they don't jump-start sales, experts say, they can generate profit through cutting costs, selling real estate and charging fees to the companies they own. They can pay themselves dividends by issuing debt on their portfolio companies.

A firm can also boost profit by taking out a loan for an acquisition, then using the company's cash to pay it off -- sort of like "paying the mortgage using someone else's money," said Jonathan Maze, an editor with trade publication Restaurant Finance Monitor.

Golden Gate has already subsidized much of its Red Lobster purchase by agreeing to sell restaurant property for $1.5 billion, then leasing it.

"They don't need to do anything [to improve performance], and they can make their money back," Maze said.

That happened in the case of Romano's Macaroni Grill, which Golden Gate bought a majority stake in for $88 million in 2008. It sold the chain last year to Ignite Restaurant Group. Ignite said that from 2010 to 2012, Macaroni Grill's sales plunged 25 percent.

"Their track record with Macaroni Grill ... it's atrocious," said John Gordon, a restaurant analyst and principal with Pacific Management Consulting Group.

But the firm more than doubled its money even though Ignite paid $33 million less than Golden Gate did. Selling off real estate contributed to that.

A Golden Gate spokeswoman described Macaroni Grill as an unusual case, saying it was purchased just before the financial crisis. She pointed to investments such as Eddie Bauer, where sales and profit have risen, and Express, which grew sales, opened new stores and went public in 2010.

On the Border Mexican Grill and Cantina and California Pizza Kitchen also appear to have fared better under Golden Gate.

At On the Border, now being sold to another investment group, year-over-year sales went up 3 percent in 2013 to $389.8 million, according to restaurant-research company Technomic.

California Pizza Kitchen, which Golden Gate bought in 2011, saw sales grow by 4 percent in 2013 to $688.5 million, Technomic's data show. New restaurants are opening, old ones are being remodeled, and there are new items on the menu.

In the case of Red Lobster, "this is a challenging situation for them," said Ned Grace, an Orlando restaurant investor. But "if they're successful, they can make good money."

Golden Gate Managing Director Josh Olshansky said in an emailed statement that Red Lobster still has growth potential. The firm isn't looking at common cost-cutting moves such as closing unprofitable restaurants or shedding employees, he said. In fact, Golden Gate expects to add Red Lobster jobs.

Plans include working on food quality, innovation and the overall customer experience, a spokeswoman said. Golden Gate also plans to expand Red Lobster internationally.

The Red Lobster sale, set to close by August, has been controversial. Two activist hedge funds have tried to stop Darden from unloading Red Lobster, saying that would destroy shareholder value. But experts say that under new ownership, away from the pressure of Wall Street, Red Lobster could turn itself around.

In a statement, Darden Chief Executive Officer Clarence Otis described Golden Gate as "a partner who has a strong track record in the industry and is equally dedicated to Red Lobster's success."

At Red Lobster, experts say there will be unique challenges besides the ones facing casual-dining restaurants in general. Not everyone likes seafood, and prices have spiked, largely because of disease in Asian shrimp farms.

Still, "Red Lobster is a really well-known name. Those stores are still profitable. They still have high volumes, and everyone knows Red Lobster," Maze said. "It has a lot going for it, and so, yeah, there's plenty of opportunity."

spedicini@tribune.com or 407-420-5240

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