PhillyDeals: Schorsch is key player in Red Lobster deal

The company that has agreed to buy the Red Lobster chain is relying on Nicholas Schorsch for most of its financing.
The company that has agreed to buy the Red Lobster chain is relying on Nicholas Schorsch for most of its financing. (DANIEL ACKER / Bloomberg)
Posted: May 22, 2014

Golden Gate Capital, the San Francisco firm that has agreed to pay $2.1 billion for Darden Group's ailing Red Lobster restaurant chain, relies for most of its financing for the deal on property mogul Nicholas Schorsch, who has built a national real estate finance business since moving his base from Jenkintown to New York during the last recession.

Schorsch's American Realty Capital Properties Inc. agreed last week to pay $1.5 billion for more than 500 Red Lobster restaurants, which it plans to lease back to Golden Gate to try to fix.

Golden Gate, which also owns Payless ShoeSource, Eddie Bauer, and California Pizza Kitchens, is borrowing from Deutsche Bank and other lenders to raise the remaining $600 million for an attempted turnaround of Red Lobster's business and brand, which has suffered as shrimp prices have soared and newer eating places have grabbed customers.

Both Darden's and American Realty's shares have slipped since the deal was announced. Some Darden investors say the price is too low: It's a "fire sale" payment that "destroys more value than it creates," James A. Mitarotonda, chairman and chief executive of New York-based investor Barington Capital Group L.P., said in a statement.

Mitarotonda would rather Darden spin off Red Lobster as a separate company - or keep the real estate and lease the restaurants to Golden Gate, without Schorsch.

But Darden boss Clarence Otis, whose company still controls Olive Garden and six other chains, says it considered and rejected both those alternatives.

The Red Lobster deal stuck "a thumb in the eye" of dissident investors who have been agitating for bigger changes at Darden, analyst Mark Kalinowski told clients at Janney Capital Markets in a report.

Darden's plan to "rid itself of its most troubled business" has reduced the ability of activist investors such as Mitarotonda to force Otis and his team "to generate meaningful change" in other areas of the company, Kalinowski added.

In 2011 and 2012, Mitarotonda pressured Pep Boys, the Philadelphia auto-repair chain, to sell to outside investors. That was followed by an abortive deal with would-be acquirer Gores Group. Pep Boys remains independent. Mitarotonda remains on the Pep Boys board, and his firm is still an investor. The company's share price has not yet returned to its 2012 highs.

Schorsch says his company will make comfortable profit margins by leasing to Red Lobster. He says American Capital could afford the deal because the company, with more than $20 billion in assets, has an "inherent advantage" over smaller retail-investment rivals.

"Cheap money" feeds chain-store deals, but sit-down restaurants come and go, says Robert Costello Jr., a Huntingdon Valley money manager who remembers Red Lobster's first pitch for investor cash in the 1980s. There's risk in pricing, economic conditions, and rival chains, Costello said.

At least the stores' real estate, he added, has lasting value.

Bargain?

Shares of Navient, the Wilmington company spun off by student-lender Sallie Mae to service and collect federal and private college loans, are worth at least $21, argues Janney analyst Sameer Gokhale in a new report.

Gokhale says that is so if you count the value of its current loans, collection, and servicing rights, and likely growth - making the recent price of around $16 a bargain.

But student loans depend on federal policy. Navient could gain income worth maybe 50 cents a share if Sen. Ron Wyden (D., Oregon) passes his student-debt collection bill. Or it could lose $5 a share if Sen. Elizabeth Warren (D., Mass.) passes her bill to enable student-loan refinancing at lower rates, Gokhale added.


JoeD@phillynews.com

215-854-5194

@PhillyJoeD

www.inquirer.com/phillydeals

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