Today's topic is Planet Hollywood, which filed for Chapter 11 bankruptcy a week ago. And today's question is: Won't someone just put this dog out of its misery?
Planet Hollywood, a trailblazer in the booming field of cheesy celebrity-themed restaurants featuring mediocre food, has been struggling for almost three years now. It has reported shrinking earnings, which eventually turned into losses, in every quarter in the last two fiscal years. If even a third of the 80 restaurants it owns around the world are making money, I'd be shocked. And since April, the company has been in default on $250 million worth of junk bonds. Trading in the company's stock has been suspended, and the announcement of Chapter 11 means that the stock is essentially worthless. (Thus demonstrating the important lesson that buying a cheap stock because you're sure it can't go any lower is a mistake.)
It's hard to feel sorry for either the bondholders or the stockholders, since this was a train wreck you could have seen coming a mile away. (Click here for an earlier piece on Planet Hollywood.) But the company's proposed restructuring plan is nonetheless dismaying. It keeps current management in place and hands over 70 percent of the equity in the company to an investor group comprising two of Planet Hollywood's largest shareholders for what is, relatively speaking, a small investment of $30 million. Current shareholders will probably walk away with nothing, current bondholders will get less than 50 cents on the dollar (and that's if everything goes perfectly), while current CEO Robert Earl and Saudi Prince Al Waleed Bin Talal will get most of the new company.
Still, my dismay is contained by the fact that 70 percent of nothing is nothing, and in the end it seems clear that that's all Planet Hollywood is worth. The striking thing about the restructuring plan is not that the equity is being redistributed but that so much energy is being put into an enterprise the upside of which seems so small. Why, after all, do we need a Planet Hollywood? There isn't a ravenous consumer demand that is going unmet. Themed restaurants have a terrible track record. And the restaurant business in general is capital-intensive, high-risk, and low-reward.
In that sense, the fact that Planet Hollywood won't just die testifies to two things: the continued strength of inertia in American business and the continued distance between the interests of corporate managers and corporate shareholders. Despite all the talk about the Schumpeterian gales of creative destruction that are raging through the American economy (and they are raging), there are still plenty of businesses that stay alive just because they are alive. In an ideal economy, capital will migrate away from inefficient and unproductive businesses and toward productive businesses.
But even though in the long run that does happen in the U.S. economy (as evidenced by the steady decline of Planet Hollywood's stock price, for instance), and even though it happens here much more than in any other country's economy, the "long run" can be very long indeed. And sometimes the mere fact that a company exists can be enough to trick investors into believing that it should exist. In a perfect world, Planet Hollywood would have disappeared two years ago, at the point when it became clear that the novelty of the business had worn off and that all the future held was empty restaurants and mounting losses.
The other thing keeping the company afloat is that it's been run by people who were taking home nice salaries and plenty of corporate perks even as they were destroying shareholder value with each passing day. For Planet Hollywood investors, the best thing would have been the liquidation of the company, which would have let them take their money and put it into real companies. But for Planet Hollywood executives, liquidation would have meant an end to their jobs. If you're being paid well to be captain, it's a lot better to let the ship slowly sink, even if scuttling it is what's best for everyone on board.
In today's hypercompetitive world, it's easy to believe that Andy Grove is right, and that only the paranoid survive. But when you look at how tenaciously Planet Hollywood is clinging to life, it seems clear that even fools can survive. Perhaps what only the paranoid do is thrive.