Rising Interest Rates and Economic Slowdown Impact Bids
Interest rates have increased since Subway announced its exploration of a sale in February, making debt more expensive and less available for buyout firms. This has affected the amount private equity firms are willing to offer for acquisitions, with bids for Subway ranging from $8.5 to $10 billion.
Debt Financing Package to Help Structure Attractive Deals
Financial adviser JPMorgan Chase & Co has introduced a $5 billion debt financing package to demonstrate that buyout firms can borrow enough to create an appealing deal even at a $10 billion-plus valuation. The package is based on a mix of loans and bonds and amounts to 6.75 times Subway's 12-month earnings before interest, taxes, depreciation, and amortization.
Whole Business Securitization: A Possible Long-Term Solution
A cheaper long-term financing option for a private-equity buyer might be whole business securitization (WBS), which involves borrowing against restaurant franchise royalties as collateral. However, WBS financing requires extensive due diligence and can take over a year, so bidders must rely on JPMorgan's debt package or arrange their own financing in the meantime.
Barclays in Discussions for Long-Term Financing
Barclays Plc, a major player in WBS financing, is reportedly discussing long-term financing options. Meanwhile, Subway has been revamping its operations to address outdated decor and $5 foot-long sandwich deals that have hurt franchisees' profits, launching a menu overhaul and marketing campaign in 2021 that has boosted sales.
JPMorgan's Financing Package Offers Preferred Equity Option
JPMorgan's financing package includes a preferred equity component option with a roughly 15% interest rate, although it is more expensive and may not be chosen by private equity firms. Subway is allowing bidders to use any financing route, as long as they can demonstrate committed financing.
Over 10 Private-Equity Firms Submit Second-Round Bids
More than 10 private-equity firms submitted second-round bids for Subway last week, with Bain Capital, TPG Inc, Advent International Corp, TDR Capital, Goldman Sachs Group Inc's buyout arm, and Roark Capital among the participants. Subway will soon permit bidders to team up before submitting final offers.
Subway's Restaurant Renovations and Strategic Shift
Subway, founded in 1965, has been owned by the founding families since its inception. The chain is moving away from its traditional reliance on single-location franchisees and consolidating with fewer, larger, well-capitalized franchisees. Global comparable sales for Subway were up 12.1% in the first quarter, driven in part by restaurant renovations.