Schorsch cash funds Red Lobster sale

It's not just the shrimp that's expensive: 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 real estate mogul Nicholas Schorsch, who works from New York with a team recruited from his past career as a suburban Philadelphia investor, backed now as then by support staff in Jenkintown and nearby office centers.

To make the deal work, Schorsch's American Realty Capital Properties Inc. agreed to pay $1.5 billion for more than 500 Red Lobster restaurants, which it plans to lease back to Golden Gate at not quite than $150 million a year, plus a 2 percent annual rent increase. Golden Gate, which also owns Payless ShoeSource, Eddie Bauer and California Pizza Kitchens, has done sale/lease deals wth American Realty before, says managing director Josh Cohen; his company is borrowing the rest of the money it needs from Deutsche Bank, GE Capital and Jeffries.

Both Darden's and American Realty's shares have declined modestly in the days since their deal was announced. Unhappy Darden investors say the price is too low: It's a "fire sale" payment that 'destroys more value than it creats," James A. Mitarotonda, chiarman and chief executive of New York investor Barington Capital Group LP, said in a statement. He'd rather Darden spin off Red Lobster as a separate company -- or keep the real estate and lease the restaurants to Golden Gate.

But Darden says it consdiered and rejected both those alternatives as less viable. In fact, Darden has given those dissidents the "middle finger," 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 like Mitarorotonda "to generate meaningful change."

(Mitarotonda in 2011-12 pressured Pep Boys, the Philadelphia-based auto-repair and supply retailer, to sell to outside investors, resulting in an abortive deal with would-be acquirer Gores Group; he remains on the Pep Boys board and his firm is still an investor; the company's share price has not yet returned to 2012 levels.)

Schorsch says he could afford to do the deal because his firm, with more than $20 billion in assets, has an "inherent advantage" over smaller retail-investment rivals.

"Sit-down restaurants are very short-term businesses," Robert Costello Jr., a Huntingdon Valley money manager who remembers when Red Lobster's founders were first raising cash in the 1980s, told me. "You get too many hiccups in pricing, the economy, other choices, and you're toast.

These deals are being fueled by cheap money," he added. "Though, just like with Sears, the sites have value."  The question is, how much, and to whom?