Outback Steakhouse – Good To Bad To Good – Another Classic Pump And Dump

Five years ago, I went to Outback Steakhouse and it was good. The quality deteriorated and I stopped going. A few weeks ago, I gave Outback Steakhouse another try, and the quality was good again.

Now that I have more emotional awareness, I’m better at detecting lousy food. I have less tolerance for rotten food. Like Gordon Ramsay, I can usually nearly instantly detect bad food. At its point of lowest quality, Outback Steakhouse had pretty bad food.

At one of my jobs, in 2008, there was an Outback Steakhouse on the ground floor. It was a huge office building. At lunchtime, the Outback Steakhouse was empty. It should have been packed. None of the workers in the building ate there, because the food was lousy.

Here are some interesting links, regarding Outback Steakhouse’s recent history.  Summarizing, in 2006, Outback Steakhouse was taken private. In 2009, Outback Steakhouse filed for bankruptcy. In 2012, it was taken public again.

Bain Capital leads the group of banksters profiting via Outback Steakhouse and financial tricks.

Outback Steakhouse is currently in the “pump” phase of the “pump and dump” cycle. With share lockout periods about to expire, insiders and Bain Capital are about to dump their overpriced shares on unsuspecting fools.

Negative real interest rates fuel hedge fund profits. Negative interest rates make financial tricks more profitable than running a stable business. That’s the reason it’s profitable to buy a business, load it up with debt, declare bankruptcy, and go public again.

Did the 2009 bankruptcy mean that Bain Capital lost money on the leveraged buyout? That isn’t necessarily true. Even though the buyout offer was for $3.2B, most of that was borrowed money. In a leveraged buyout. the target corporation finances its own buyout, as the hedge fend loads it up with debt. The hedge fund pays itself a huge dividend immediately after the buyout, getting most of its investment back. The hedge fund also gets a huge management fee, for running the business.

For example, suppose the leveraged buyout price is $3.2B. The hedge fund might only put up $500M and borrow the remaining $2.7B. The buyout target is the collateral for the loan. Shortly after the buyout, the hedge fund pays itself a dividend of $300M or more, leaving it a net investment of only $200M. If there is an inflationary boom, the buyout target increases in value to $10B. The hedge fund made a profit of $6.8B on a $200M investment in a few years. That’s a ridiculously high rate of return.

Even if there is a recession and no inflationary boom, the hedge fund can come out ahead. They pay themselves a huge dividend immediately after the buyout closes. There is a potential huge profit and at worst a small loss.

The hedge fund doesn’t do any real work. They’re exploiting the State subsidy of negative real interest rates. The hedge fund borrows at 5%-10%, while true inflation is 20%-30% or more.

This also is the reason that every corporation must have a lot of debt on its balance sheet. If a corporation had no debt, it would be a leveraged buyout target. Only huge corporations like Apple, Google, and Microsoft can afford to have huge cash reserves, because they’re too big to be a leveraged buyout target.

After a leveraged buyout, profits initially rise. Costs are cut. R&D budgets are slashed. It takes customers awhile to realize that the quality is gone, and stop going.

In a restaurant, when you switch to lousy food, it takes awhile for customers to leave. The first time you serve someone bad food, the customer thinks “They had a bad day. It used to be good, so I’ll give them another chance.” Eventually, customers abandon the restaurant. In the meantime, the restaurant gets an earnings boost.

Due to the way stocks and businesses are evaluated, any short-term earnings boost is extrapolated for the next 5-20 years. If the restaurant gets an brief earnings boost by cutting quality, that really increases the valuation. The valuation increase is a lot more than the short-term earnings boost, due to the effect of using a P/E multiplier to value businesses.  The hedge fund can borrow more money at the higher valuation, taking out as much cash as possible and paying itself a huge dividend.

With a high debt burden and lousy food, there’s a bankruptcy filing. The hedge fund (or another hedge fund) buys up all the bonds at a huge discount. They get control of the business after the bankruptcy.

The hedge fund maximizes its profit by having a severe bankruptcy crash! They get to buy low and sell high! Who loses? The loss comes from other banks and hedge funds, tricked into buying overpriced bonds. For example, a pension fund may have a huge loss buying overpriced bonds, while the hedge fund makes a huge profit.  The bondhonders sometimes come out ahead, when there’s an inflationary boom that makes the leverage and debt pay off.  The bonds pay junk/high interest rates, so the gains might offset the losses.  Again, that is possible because interest rates are negative.  A real return of 4-8% is a negative inflation-adjusted return, but it’s better than other bond investments.

With a leveraged buyout hedge fund, each deal is a separate corporation. Even though one business declares bankruptcy, that doesn’t affect the other businesses the hedge fund owns. The hedge fund also exploits the State subsidy of limited liability incorporation. Limited liability enables the hedge fund to declare bankruptcy and default.

If there is an inflationary boom, the hedge fund skips the bankruptcy part of the cycle. With lots of debt, high leverage, and high inflation, the hedge fund makes huge profits. The hedge fund takes the business public again via an IPO, and cashes out for a huge profit. In this case, the bondholders make a nice profit. They were earning high junk interest rates.

Then the hedge fund switched from lousy food to good food. Earnings skyrocket, and customers come back. They remember that the restaurant used to be good, so advertising or coupons entice them to try again.  Again, current earnings boost is extrapolated for the next 5-20 years.  By switching from lousy food to decent food, there’s a one-time earnings boost as customers return, *BUT* valuing a business by the 2nd or 3rd derivative of earnings gives that business a *HUGE* valuation.

At this point, the hedge fund has an IPO and sells the corporation back to an unsuspecting public. By restoring quality, the corporation has huge earnings growth. Clueless investors extrapolate, anticipating that high earnings growth will continue indefinitely.  Earnings only need to be padded for 2-3 quarters, and unsuspecting investors can be tricked into buying the shares.

Outback Steakhouse recently had its IPO. It’s at the “pump” phase of the pump and dump cycle. By switching to quality food and other accounting tricks, the hedge fund tricks clueless investors into buying. The high share price only needs to be maintained for 6 months, until share lock-up agreements expire and the hedge fund dumps its shares. Eventually, the share price tanks, the business is taken private in another leveraged buyout, and the cycle continues again.

For Outback Steakhouse, Bain Capital is profiting via financial tricks. This pattern applies to most leveraged buyouts. The blame lies not with Bain Capital. Bain Capital is merely exploiting the corrupt system that already exists; if they weren’t doing it, someone else would.  (However, banksters will always lobby against real reform.)  The blame lies with a corrupt monetary system. Negative real interest rates fuel hedge fund profits. Negative interest rates make it profitable to buy out a business and load it with debt.

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