An exterior view of a Subway sandwich shop in Danville, Pennsylvania on Jan. 28, 2023.
Paul Weaver | SOPA Images | LightRocket | Getty Images
The bankers running the sale process for Subway have given the private equity firms vying for the sandwich chain a $5 billion acquisition financing plan, hoping to overcome a challenging environment for leveraged buyouts and fetch the company’s asking price of more than $10 billion, people familiar with the matter said.
Interest rates have been rising and concerns about an economic slowdown have increased since Subway said in February it was exploring a sale, making debt more expensive and less available for buyout firms pursuing deals. This is weighing on how much the private equity firms are offering to buy companies.
So far, bids for Subway have ranged between $8.5 billion and $10 billion, one of the sources said. Subway’s financial adviser, JPMorgan Chase & Co, is now hoping a $5 billion debt financing package it has put forward will show buyout firms they can borrow enough to structure an attractive deal even at a $10 billion-plus valuation, the sources said.
The debt financing is based on a mix of loans and bonds and its size is equivalent to 6.75 times Subway’s 12-month earnings before interest, taxes, depreciation and amortization of about $750 million, the sources added.
It is possible that this financing will serve only as a temporary solution. This is because a cheaper option for a private-equity buyer of Subway would likely be to finance the acquisition long-term through a so-called whole business securitization (WBS), the sources said. This would involve borrowing using the royalties of restaurant franchises as collateral.
WBS financing requires store-by-store due diligence by ratings agencies which can take more than a year. Bidders would have to rely on JPMorgan’s debt package or arrange their own financing to clinch a deal with Subway, and then refinance through a WBS scheme down the line, the sources said.
Barclays, a major player in the market for WBS financing, is one of the banks in discussions about long-term financing, the sources said.
Milford, Connecticut-based Subway has been revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that eroded franchisees’ profits. In 2021, the chain launched a menu overhaul and splashy marketing campaign as it embarked on a turnaround plan that has helped sales grow.
JPMorgan’s financing package also offers the option of a preferred equity component with a roughly 15% interest rate, the sources said. This is a more expensive route that private equity firms may not opt for, three of the sources added.
To be sure, Subway is allowing bidders to use any financing route they want, as long as they can show they can secure committed financing.
Second-round bids for Subway came in last week from more than 10 private-equity firms, one of the sources said, adding that Subway has dropped low bids and is whittling down the pool of final bidders. Bain Capital, TPG, Advent International Corp, TDR Capital, Goldman Sachs’s buyout arm and Roark Capital are among the private-equity firms that are participating in the auction, according to the sources.
Subway will soon allow bidders to team up before submitting final offers, and Bain, TPG and Advent have already been in discussions about doing so, the sources added.
The sources requested anonymity because details of the sale process are confidential. Bain, TPG and Advent declined to comment. TDR and Roark did not immediately respond to comment requests. Subway, JPMorgan, Goldman Sachs and Barclays declined to comment.
Restaurant renovations
Founded in 1965 by 17-year-old Fred DeLuca and family friend Peter Buck, the company has been owned by the founding families since its first restaurant opened as “Pete’s Super Submarines” in Bridgeport, Connecticut.
The chain, which has nearly 37,000 locations globally, is moving away from its traditional reliance on franchisees who own only one or two locations and is instead consolidating locations with fewer and larger, well-capitalized franchisees.
Subway reported earlier this month that global comparable sales were 12.1% higher in the first quarter and that guest visits rose, driven in part by restaurant renovations. It has been facing growing competition from rivals such as Jimmy John’s, Firehouse Subs, Jersey Mike’s Subs and Potbelly.
TPG and Bain were part of a group that owned Burger King when John Chidsey, who is now Subway’s CEO, headed that burger fast-food restaurant chain. Advent, for its part, has invested in restaurants including Bojangles and café operator First Watch. TDR operates grocery retailer ASDA and gas station conglomerate EG Group.
