The Rise of Jersey Mike's: A Cautionary Tale in Private Equity
Jersey Mike's, famed for its motto, "A sub above," has evolved from a modest sandwich shop on the Jersey Shore, founded in 1956, into a billion-dollar chain loved by millions of Americans. However, this success story has recently attracted the attention of Wall Street, culminating in the staggering acquisition of Jersey Mike's by the Blackstone Group for $8 billion. This acquisition raises questions about private equity's influence and the often-hidden mechanisms behind profitable deals in seemingly thriving companies.
To fully grasp the implications of Jersey Mike’s acquisition, it’s essential to understand the private equity landscape. Private equity investments began in the mid-20th century, focusing on pooling capital to acquire and restructure underperforming companies. During the 1980s, factors like low-interest rates allowed this sector to flourish, transforming into a dominant force on Wall Street. Iconic private equity firms such as KKR and the Blackstone Group, with assets exceeding $1 trillion, pioneered the art of leveraging debt to gain control of companies, often leading to significant profits regardless of the businesses' real performance.
Notably, firms like Blackstone have a history of not just enhancing value in their acquisitions but, rather, leveraging financial engineering strategies to ensure profitability. Unfortunately, this often occurs at the expense of the companies they purchase, exemplifying a playbook filled with tactics that can leave businesses in ruins.
A Troubling Legacy
The legacy of private equity is littered with cautionary tales. Once-celebrated companies like Toys R Us, Payless Shoe Source, and Sears were acquired and stripped of their assets, only to face bankruptcy. The approach typically involves accumulating heavy debt while extracting value through management fees, asset sales, and dividends, often referred to as "vulture capitalism."
The case of Red Lobster illustrates this troubling trend clearly. After its acquisition by Golden Gate Capital in 2014 for $2.1 billion, the company was effectively dismantled. By selling valuable real estate and forcing Red Lobster to lease these locations back at inflated rates, profits were extracted quickly, leaving the acquired business impoverished. After a series of financial struggles, exacerbated by the pandemic, Red Lobster filed for bankruptcy in May 2024, after having closed multiple locations without notifying employees beforehand. Golden Gate had already profited significantly from their initial investment and exited long before the collapse.
Now, as Blackstone gears up to steer Jersey Mike's, many are left wondering how this acquisition will play out. The private equity playbook follows a specific pattern:
Leverage: In a leveraged buyout, the majority of the acquisition cost is covered through loans. When Blackstone acquired Jersey Mike's for $8 billion, up to 80% of that sum was likely borrowed, putting the debt burden on the company rather than the equity firm.
Collect Fees: Private equity firms often charge a 2% annual management fee on the total fund, ensuring they profit regardless of company performance. This means from the get-go, Blackstone stands to gain significant sums merely from ownership.
Strip Assets: Acquired companies typically possess valuable assets. These are sold off, generating immediate cash flow often used to pay dividends to investors rather than reinvest in the business, allowing the equity firm to recoup its investment soon after acquisition.
Cost Cutting: Firms will often impose aggressive measures to reduce expenditures, which may include workforce layoffs and reduced product quality. While this may enhance short-term profitability, it jeopardizes the long-term health of the business.
The Exit: Ideally, private equity firms aim to sell their investment for profit, but should a company fail, they benefit from the fees and asset sales, leaving the burden of the debt on the company and its employees. Even in the event of bankruptcy, they often emerge financially unscathed.
Moving Forward: A Call to Action
Given the troubling implications of private equity dominance, the emphasis needs to shift towards nurturing local economies and supporting small businesses. Tiffany Canani, a small business advocate, highlights several actionable steps for consumers:
Support Local Businesses: Look beyond polished advertising and seek out small businesses within your community. Encourage your neighbors and connect through social media to discover these gems.
Ask Hard Questions: When engaging with a business, inquire about its ownership structure, specifically if it's been acquired by private equity. Knowledge empowers consumers.
Divest from Private Equity: Although tough, a long-term commitment to divesting from private equity-owned businesses can pressure these firms to modify their practices or lose consumer interest.
While private equity might seem deeply entrenched in the American economy, the path forward requires mutual awareness and vigilant action from consumers. By emphasizing community engagement and local investment, collective power can initiate change and prioritize values over profits.
This review of Jersey Mike’s acquisition by Blackstone not only unpacks the implications of financial maneuvering but also serves as a clarion call to nurture sustainable and equitable economic practices for a brighter future.
Part 1/9:
The Rise of Jersey Mike's: A Cautionary Tale in Private Equity
Jersey Mike's, famed for its motto, "A sub above," has evolved from a modest sandwich shop on the Jersey Shore, founded in 1956, into a billion-dollar chain loved by millions of Americans. However, this success story has recently attracted the attention of Wall Street, culminating in the staggering acquisition of Jersey Mike's by the Blackstone Group for $8 billion. This acquisition raises questions about private equity's influence and the often-hidden mechanisms behind profitable deals in seemingly thriving companies.
Understanding Private Equity
Part 2/9:
To fully grasp the implications of Jersey Mike’s acquisition, it’s essential to understand the private equity landscape. Private equity investments began in the mid-20th century, focusing on pooling capital to acquire and restructure underperforming companies. During the 1980s, factors like low-interest rates allowed this sector to flourish, transforming into a dominant force on Wall Street. Iconic private equity firms such as KKR and the Blackstone Group, with assets exceeding $1 trillion, pioneered the art of leveraging debt to gain control of companies, often leading to significant profits regardless of the businesses' real performance.
Part 3/9:
Notably, firms like Blackstone have a history of not just enhancing value in their acquisitions but, rather, leveraging financial engineering strategies to ensure profitability. Unfortunately, this often occurs at the expense of the companies they purchase, exemplifying a playbook filled with tactics that can leave businesses in ruins.
A Troubling Legacy
The legacy of private equity is littered with cautionary tales. Once-celebrated companies like Toys R Us, Payless Shoe Source, and Sears were acquired and stripped of their assets, only to face bankruptcy. The approach typically involves accumulating heavy debt while extracting value through management fees, asset sales, and dividends, often referred to as "vulture capitalism."
Part 4/9:
The case of Red Lobster illustrates this troubling trend clearly. After its acquisition by Golden Gate Capital in 2014 for $2.1 billion, the company was effectively dismantled. By selling valuable real estate and forcing Red Lobster to lease these locations back at inflated rates, profits were extracted quickly, leaving the acquired business impoverished. After a series of financial struggles, exacerbated by the pandemic, Red Lobster filed for bankruptcy in May 2024, after having closed multiple locations without notifying employees beforehand. Golden Gate had already profited significantly from their initial investment and exited long before the collapse.
Jersey Mike’s: A New Case Study
Part 5/9:
Now, as Blackstone gears up to steer Jersey Mike's, many are left wondering how this acquisition will play out. The private equity playbook follows a specific pattern:
Leverage: In a leveraged buyout, the majority of the acquisition cost is covered through loans. When Blackstone acquired Jersey Mike's for $8 billion, up to 80% of that sum was likely borrowed, putting the debt burden on the company rather than the equity firm.
Collect Fees: Private equity firms often charge a 2% annual management fee on the total fund, ensuring they profit regardless of company performance. This means from the get-go, Blackstone stands to gain significant sums merely from ownership.
Part 6/9:
Strip Assets: Acquired companies typically possess valuable assets. These are sold off, generating immediate cash flow often used to pay dividends to investors rather than reinvest in the business, allowing the equity firm to recoup its investment soon after acquisition.
Cost Cutting: Firms will often impose aggressive measures to reduce expenditures, which may include workforce layoffs and reduced product quality. While this may enhance short-term profitability, it jeopardizes the long-term health of the business.
Part 7/9:
Moving Forward: A Call to Action
Given the troubling implications of private equity dominance, the emphasis needs to shift towards nurturing local economies and supporting small businesses. Tiffany Canani, a small business advocate, highlights several actionable steps for consumers:
Part 8/9:
Ask Hard Questions: When engaging with a business, inquire about its ownership structure, specifically if it's been acquired by private equity. Knowledge empowers consumers.
Divest from Private Equity: Although tough, a long-term commitment to divesting from private equity-owned businesses can pressure these firms to modify their practices or lose consumer interest.
While private equity might seem deeply entrenched in the American economy, the path forward requires mutual awareness and vigilant action from consumers. By emphasizing community engagement and local investment, collective power can initiate change and prioritize values over profits.
Part 9/9:
This review of Jersey Mike’s acquisition by Blackstone not only unpacks the implications of financial maneuvering but also serves as a clarion call to nurture sustainable and equitable economic practices for a brighter future.