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Subway devises a financial strategy to close a new deal

In an effort to overcome the challenging surroundings for leveraged buyouts and obtain the company’s requesting cost of more than $10 billion, the bankers overseeing the sale procedure for Subway have provided the private equity firms bidding for the sandwich chain with a $5 billion acquisition funding plan, sources had informed.

Since Subway announced in February that it was considering a sale, interest rates have been increasing and worries about a downturn in the economy have grown, making finance more expensive and less accessible for buyout groups pursuing acquisitions.

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This affects the price that private equity firms are willing to pay to acquire businesses.

According to one of the reports, the current range of bids for Subway ranges from $8.5 billion and $10 billion.

While JPMorgan Chase & Co. (JPM.N), who is Subway’s financial advisor, remains hopeful that a $5 billion debt financing plan it has proposed will demonstrate to buyout companies that they can borrow about enough to create a desirable deal even at a $10 billion or higher value, the sources said.

Sources claimed the debt financing, which consists of a combination of loans and bonds, approximately 6.75 times Subway’s $750 million annual earnings before interest, hefty taxes, depreciation, and amortisation.

It’s probable that this funding will just be a short-term fix.

This is due to the fact that a private equity purchaser of Subway would probably find it more cost-effective to finance the purchase over the long term through a full company securitization (WBS).

This would include borrowing money and using franchise royalties as security.

Ratings agencies must conduct store-to-store due diligence for WBS financing, which can take over a year.

To close a transaction with Subway, bidders would have to rely strongly on JPMorgan’s loan package or get their own financing, then later refinance through a WBS programme, the sources claimed.

One of the banks involved in conversations about long-term funding is Barclays Plc (BARC.L), a significant player in the industry for WBS financing, according to the sources.

Subway, based in Milford, Connecticut, has been updating its operations to address antiquated decor and $5 foot-long sandwich specials that reduced franchisee profitability.

The chain began a turnaround plan that resulted in a sales increase in 2021 with the launch of a new menu and a blitzy marketing campaign.

There is also the choice of a preferred equity element with a 15% interest rate included in JPMorgan’s financing package.

Three of the individuals also said that because this is a more expensive option, private equity firms might not choose it.

Yes, Subway allows bidders to use any form of financing they choose, provided they can demonstrate that they can obtain committed financing.

More than ten private equity companies submitted 2nd-round bids for Subway last week, one of the sources claimed, adding that Subway has dismissed low bids and is narrowing the field of final bidders.

Meanwhile, among the private equity companies taking part in the auction are Advent International Corp, Bain Capital, TPG Inc (TPG.O), TDR Capital, Roark Capital, and Goldman Sachs Group Inc’s (GS.N) takeover arm according to the people.

Bain, TPG, and Advent have already had discussions with Subway about allowing bidders to collaborate before submitting final offers, the people said.

The sources asked to remain anonymous because the specifics of the sale process are private. TPG, Advent, and Bain all declined to comment. Requests for comments from TDR and Roark were not immediately reacted to.

JPMorgan, Barclays, Goldman Sachs, and Subway, alongside others declined to comment.

The firm was established in 1965 by a family friend named Peter Buck and back then, with 17-year-old Fred DeLuca. Since the opening of Pete’s well-known Super Submarines in Bridgeport at Connecticut, the business has been owned fully by the founding families.

The network, which has around 37,000 outlets worldwide, is combining locations with fewer and much larger, well-capitalized franchisees in place of its traditional dependence on franchisees who operate only one or two shops.

Tags: businessstrategysubway

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