According to insiders, the bankers in charge of managing the sale of Subway are offering a $5 billion acquisition financing scheme to private equity firms competing for the sandwich chain. This move is aimed at tackling the difficult climate for leveraged buyouts and achieving Subway’s desired price tag of over $10 billion.
After Subway declared its intent to pursue a sale in February, interest rates have been steadily climbing and concerns regarding a potential economic downturn have intensified. Consequently, buyout firms looking to close deals are finding it harder to obtain debt financing at an affordable cost. As a result, private equity companies are offering less money for the acquisition of businesses.
According to insiders, offers for Subway have fallen within the $8.5 billion to $10 billion range. JPMorgan Chase & Co, Subway’s financial advisor, has proposed a $5 billion debt financing package in the hopes of demonstrating to buyout firms that they can obtain sufficient funds to create an appealing deal even with a valuation exceeding $10 billion.
As per insiders, the debt financing for Subway comprises a blend of loans and bonds, and its magnitude is comparable to 6.75 times Subway’s earnings before interest, taxes, depreciation, and amortization for a 12-month period. This figure is approximately $750 million.
Sources suggest that the recently proposed financing for Subway could be a transitory measure. This is because a more cost-effective alternative for a private equity buyer would be to finance the acquisition through a whole business securitization (WBS) in the long run. Such an approach would involve borrowing against the royalties generated by the restaurant franchises, which would serve as collateral.
The WBS financing option would require a thorough store-by-store analysis by rating agencies, which typically takes more than a year to complete. Therefore, in order to acquire Subway, bidders would have to either rely on JPMorgan’s suggested debt package or arrange for their own financing. Following the acquisition, the buyers could then refinance the deal through a WBS scheme later on.
Sources state that Barclays Plc, a leading participant in the whole business securitization (WBS) financing arena, is one of the banks currently in negotiations concerning long-term financing for the Subway acquisition.
Subway, headquartered in Milford, Connecticut, has been overhauling its operations to address issues such as outdated decor and discounted $5 foot-long sandwiches, which reduced franchisees’ profitability. In 2021, the company revamped its menu and launched an eye-catching marketing campaign, as part of its turnaround strategy, which has led to increased sales. According to insiders, JPMorgan’s financing package includes a preferred equity component that carries an interest rate of approximately 15%, but this is a pricier option that some private equity firms may choose to avoid. Three sources added this information.
It is worth noting that Subway is permitting bidders to employ any financing avenue they desire, provided they can demonstrate that they can secure committed financing.
According to an insider, over 10 private-equity firms submitted their second-round bids for Subway last week, and the company has eliminated low offers while narrowing the field of final bidders. Bain Capital, TPG Inc, Advent International Corp, TDR Capital, Goldman Sachs Group Inc’s buyout arm, and Roark Capital are among the private-equity firms participating in the auction, as per sources.
Insiders indicate that Subway will soon enable bidders to collaborate before submitting their final proposals. Additionally, sources claim that Bain, TPG, and Advent have already engaged in talks about forming a team for this purpose.
As the details of the sale process are confidential, the sources have requested anonymity. Bain, TPG, and Advent have declined to comment, whereas TDR and Roark have yet to respond to requests for comments. Subway, JPMorgan, Goldman Sachs, and Barclays have also declined to comment.
Restaurant renovations:
The company was founded in 1965 as “Pete’s Super Submarines” in Bridgeport, Connecticut, by 17-year-old Fred DeLuca and family friend Peter Buck. Since the opening of its first restaurant, the company has been owned by the founding families.
Subway, with almost 37,000 locations worldwide, is shifting its focus from relying on franchisees who operate only one or two locations to consolidating its locations under fewer, larger, and well-capitalized franchisees.
Earlier this month, Subway announced that its global comparable sales for the first quarter were 12.1% higher and guest visits had increased, partly due to restaurant renovations. However, Subway faces stiff competition from rivals like Firehouse Subs, Jersey Mike’s Subs, Jimmy John’s, and Potbelly Corp.
TPG and Bain were part of a consortium that owned Burger King during John Chidsey’s tenure as CEO of the fast-food chain. Chidsey is currently CEO of Subway. Meanwhile, Advent has invested in restaurant chains like Bojangles and cafe operator First Watch. TDR Capital operates grocery retailer ASDA and gas station conglomerate EG Group.
