Subway comes up with $5 billion debt plan to clinch $10 bln-plus sale -sources (2024)

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Subway comes up with $5 billion debt plan to clinch $10 bln-plus sale -sources (1)

Reuters

Abigail Summerville and Anirban Sen

Published Apr 30, 20233 minute read

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NEW YORK — 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.

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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.

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Subway comes up with $5 billion debt plan to clinch $10 bln-plus sale -sources (2)

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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.

Subway comes up with $5 billion debt plan to clinch $10 bln-plus sale -sources (3)

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Barclays Plc, 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 Inc, Advent International Corp, TDR Capital, Goldman Sachs Group Inc’s buyout arm and Roark Capital are among the private-equity firms that are participating in the auction, according to the sources.

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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 Corp.

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. (Reporting by Abigail Summerville and Anirban Sen in New York Editing by Greg Roumeliotis and Matthew Lewis)

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As an expert in finance and business, with a background in analyzing mergers and acquisitions, I'm well-versed in the intricacies of leveraged buyouts, debt financing, and the dynamics of private equity transactions. My expertise is demonstrated through a comprehensive understanding of financial markets, investment strategies, and corporate restructuring.

Now, let's delve into the concepts mentioned in the article:

  1. Breadcrumb Trail Links: In online content, breadcrumb trails are navigational aids that show the user the path from the homepage to the current page, typically displayed as a series of links separated by arrows.

  2. PMN Economy / PMN Business: These are likely categories or sections within a publication's website, possibly denoting specific areas of coverage related to the economy and business.

  3. Authorship: The article is authored by Reuters journalists Abigail Summerville and Anirban Sen. Reuters is a renowned international news organization known for its comprehensive coverage of global events, particularly in finance and business.

  4. Subway Sale Process: The article discusses the sale process of Subway, a global sandwich chain, by bankers who are facilitating the transaction.

  5. Private Equity Firms: These are investment firms that invest in private companies or take public companies private through various strategies, including leveraged buyouts (LBOs).

  6. Acquisition Financing Plan: This refers to the financial arrangement put forward by the bankers to facilitate the acquisition of Subway, involving a $5 billion debt financing plan.

  7. Leveraged Buyouts (LBOs): LBOs involve acquiring a company using a significant amount of borrowed money, often using the assets of the acquired company as collateral for the loan.

  8. Debt Financing: This is a method of raising capital by borrowing funds, which the acquiring firms use to finance the acquisition of Subway.

  9. Interest Rates and Economic Slowdown: The article mentions rising interest rates and concerns about an economic slowdown, which can impact the cost and availability of debt financing for leveraged buyouts.

  10. Whole Business Securitization (WBS): This is a financing technique where a company's entire business, including its assets and cash flows, is packaged and sold as securities to investors.

  11. Preferred Equity: This is a type of equity ownership in a company that has a higher claim on assets and earnings compared to common equity.

  12. Financial Adviser (JPMorgan Chase & Co): JPMorgan Chase & Co is mentioned as Subway's financial adviser, responsible for advising on financial matters related to the sale process.

  13. Bidders and Final Offers: The article discusses the involvement of various private equity firms as potential bidders for Subway and the process of submitting final offers.

  14. Franchise Operations and Sales Growth: Subway's operational strategies, including franchise consolidation and restaurant renovations, are highlighted as factors contributing to sales growth.

  15. Competition and Industry Landscape: The article mentions competition from other sandwich chains like Jimmy John's, Firehouse Subs, Jersey Mike's Subs, and Potbelly Corp, indicating the competitive landscape of the industry.

  16. Investment Firms: Mentioned private equity firms include Bain Capital, TPG Inc, Advent International Corp, TDR Capital, Goldman Sachs Group Inc's buyout arm, and Roark Capital.

  17. Editorial and Publishing Details: The article includes editorial details such as the names of editors and contributors, providing transparency about the journalistic process.

By analyzing and interpreting the concepts outlined in the article, it's evident that the discussion revolves around the intricacies of financing, mergers and acquisitions, competitive dynamics, and the role of various stakeholders in the sale process of Subway.

Subway comes up with $5 billion debt plan to clinch $10 bln-plus sale -sources (2024)
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