Thomas Lyons 
Subway, the sandwich chain, has been exploring a sale since February, and the bankers running the sale process have given private equity firms a $5bn (€4.5bn) acquisition financing plan. The aim is to overcome a challenging environment for leveraged buyouts and fetch the company’s asking price of more than $10bn. This move comes as interest rates have been rising and concerns about an economic slowdown have increased, 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.
According to sources, bids for Subway so far have ranged between $8.5bn and $10bn. Subway’s financial adviser, JPMorgan Chase, is now hoping a $5bn debt financing package will show buyout firms they can borrow enough to structure an attractive deal even at a $10bn-plus valuation. 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 of about $750m.
However, it is possible that this financing will serve only as a temporary solution. 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 securitisation. This would involve borrowing using the royalties of restaurant franchises as collateral. Such financing requires store-by-store due diligence by ratings firms 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 scheme down the line.
Subway, founded in 1965 by 17-year-old Fred DeLuca and family friend Peter Buck, 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-capitalised franchisees.
In 2021, the chain launched a menu overhaul and splashy marketing campaign in the US as it embarked on a turnaround plan that has helped sales grow. The company has not publicly commented on the sale process.
This financing package is a sign of the challenges facing private equity firms in the current economic climate. However, if the $5bn debt financing package is successful, it could encourage other firms to use similar financing methods. The outcome of the sale process will be closely watched by the private equity industry, as it could set a precedent for future deals.
