Key Events
👉 Endless Shrimp and the Red Lobster Trap
Red Lobster is the nation’s largest seafood chain that recently filed for Chapter 11 bankruptcy, effectively transferring the ownership of the business to its creditors to which the chain owed $300M dollars.
Under a Chapter 11 bankruptcy process, the goal is not complete liquidation. The goal is to turnaround the operations of the business. So, it is referred to as a restructuring. There are two sides to a restructuring, an asset (operational-focused) and/or financial restructuring. Management is working on both sides of the balance sheet, selling locations, bringing in fresh money, and renegotiating debt terms.
The 580 of over 700 restaurant locations will still remain open throughout the Chapter 11 process. Although they have closed dozens of select locations.
The goal is often to negotiate an out-of-court restructuring. In-court-restructurings are less common. They are timely and expensive. Reduce brand equity and corporate culture. So why go into Chapter 11? They likely had no negotiating power left. That is they were not able to successfully negotiate either extensions, new terms, or new structure with all the significant creditors.
The benefit of Chapter 11? (i) The Automatic Stay, (ii) DIP financing, (iii) negotiating power. Automatic Stay gets invoked when a company files for bankruptcy, temporarily preventing creditors from trying to collect money or seize property. Debtor-in-possession (DIP) financing helps inject new capital into the business to fund the turnaround. The courts can help restructuring approval through approving a Plan of Reorganization (POR) in a cramdown proceeding.
So, what’s next? Red Lobster entered a stalking horse purchase to sell its business to an entity controlled by the creditors. Remember, equity investors will get wiped. Lenders will have ownership over the new company post-bankruptcy.
When the sale is approved by the courts, the debtor signs a binding agreement with the first interested buyer, known as the stalking horse, who sets the minimum bid for others. If no higher bids are received during the auction, the stalking horse wins. As is the case with Red Lobster. The goal of a stalking horse purchase is the initial buyer in a bankruptcy asset sale sets the floor price.
Fun fact: Facing declining traffic in its restaurants after and amid the pandemic, Red Lobster offered an ‘all you can eat shrimp’ every day of the week for $20 to boost traffic. Count me in. I’ll be there.
To Red Lobster’s dismay, customers ordered this more often than they expected, causing the chain to lose out on margins. Suboptimal.
👉 High Commodity Prices Could Delay Interest Rate Cuts
According to the World Bank, commodity prices are expected to remain higher than pre-pandemic levels, making it more difficult for Central Banks to loosen monetary policy.
Higher prices despite low economic growth are mainly a result of rising commodity prices due to geopolitical risks and strengthening demand for key metals because of the clean energy transition.
Some possible risks involve US shale oil producers failing to meet production targets as they need to allocate their profits to shareholders rather than reinvestment.
👉A Chinese Phone Maker Enters the EV Business
Xiaomi, a Chinese company known for the production of rice-cookers and phones, is now manufacturing electric vehicles.
The company’s SU7 is priced between $30,000 and $42,000. It can go up to 500 miles on one charge, outrunning Tesla by 200 miles per charge and undercutting it by $4,000.
China is speeding away in the EV race as the hardware has become simpler and the focus has been on software and its features.
Mergers and Acquisitions
SouthState Corp will buy Texas-based Independent Bank Group for ~$2B.
Private Equity
Carlyle to buy Japan KFC operator for $835B.
Initial Public Offerings
Aeromexico airlines is filing for an IPO to raise $300M.
Venture Capital
Overland AI, off-road autonomy vehicles for defense, secures $10M in seed funding.
