Up for Sale, Shrinking Franchise Hopes to Ease Buyer’s Economic Obstacles
Since early January, the Subway sandwich chain has been seeking a buyer that could afford its roughly $10 billion price tag. The economy has not been kind to wannabe suitors who have seen interest rates climb and capital tighten as weeks have marched by, however. So bankers handling the deal have arranged a $5 billion financing plan for private equity firms to make the sale of the franchise – which has been shrinking in the United States since 2020 – more doable, Reuters reported on Sunday.
Armed with that $5 billion debt financing package set up by Subway’s financial adviser, JPMorgan Chase & Co., buyout firms can borrow enough to close the acquisition and still end up with an enticing deal, sources told Reuters. The financing package is a blend of bonds and loans that equal 6.75 times Subway’s 12-month earnings before interest, taxes, depreciation and amortization of about $750 million, the sources said.
JPMorgan’s package also would allow the buyer to choose a preferred-equity component with an interest rate of approximately 15%, Reuters reported. This is a pricier option, so private equity firms might not go for it, three sources told Reuters.
Financing Package as a Stopgap
The acquisition financing package will probably be only a temporary measure. A private-equity buyer would most likely prefer to finance the Subway purchase long-term via a whole business securitization (WBS), Reuters’ sources said. The buyer would use Subway franchisees’ royalties as collateral for the WBS.
But WBS financing takes time, possibly more than a year, because it mandates that due diligence for every restaurant be undertaken by ratings agencies. A buyer could use the new $5 billion acquisition financing package during the due diligence process and refinance later under a WBS, according to Reuters’ sources. Barclays Plc (public limited company) reportedly is one of the banks in discussions about long-term WBS financing.
One source told Reuters that second-round bids from 10-plus private equity firms arrived in late April and ranged from $8.5 billion to $10 billion. Bain Capital, TPG Inc., Advent International Corp., TDR Capital, Goldman Sachs Group Inc.’s buyout arm and Roark Capital are among the potential buyers, according to the Reuters article. Subway has already dropped the low bids from contention, the article said.
Subway Updates and Improvements
Over many months leading up to the sale announcement, Subway has worked to update its restaurant interiors and move away from the $5 foot-long sandwiches that hurt franchisees’ bottom line. In 2021, the chain revamped its menu and launched a sports-celebrity marketing campaign to bring in more customers as part of CEO John Chidsey’s turnaround plan. And things are looking up in some ways: In April, Subway reported that global comparable sales were 12.1% higher in the first quarter.
But in an article posted Monday, Reuters reported that Subway shed 2.7% of its U.S. shops in 2022. While that was a net reduction of 571, it represents a slowdown in closures from the two previous years. Subway franchisees shuttered 1,000-plus net U.S. locations in 2021 and 1,609 in 2020.
Franchisee adviser Robert Edwards said the store closings dent the franchise’s image. “That’s baggage that they’ll be hard-pressed to step away from,” Edwards told Reuters. Reuters quoted from a Subway company statement defending its position, however: “We have spent the past two years optimizing our footprint by using a strategic, data-driven approach to ensure restaurants are in the right location, image and format. This includes opening new locations, with quality remaining a top priority, relocating restaurants to maximize guest traffic and closing locations when needed.”
Subway has roughly 37,000 total locations globally and has said it will expand more in North America this year, according to Reuters. “In 2023, our goal is to increase new openings across North America by approximately 35% compared to 2022,” the company said in a statement.
Founded in 1965 by 17-year-old Fred DeLuca and family friend Peter Buck, the Connecticut headquartered chain has always been owned by the founding families. With close to 37,000 stores worldwide, Subway recently has courted multi-unit franchisees, a major change from its past tendency of having owners who operate only one or two restaurants.