Subway remains for sale, despite an oft-delayed process that's taken all year. There are still reports of potential buyers emerging along with hoped-for deadlines, which means the sale process remains a sale process and not something else. So, before we talk about why this is taking so long, let's round up some recent reports in this rather public auction process:
TDR Capital and Roark Capital are apparently competing to buy the company. TDR may partner with Sycamore Partners to bid on the sandwich giant, according to Reuters. But Advent International is pausing its pursuit of the chain, according to Bloomberg. Exactly how many private equity firms are still bidding on the chain at the moment remain uncertain, but Roark has apparently reconciled the fact that it could own both Subway and competing chain Jimmy John’s.
(Me: Why not just take Inspire Brands public, get that over with, and not worry about it?)
JP Morgan apparently wants to get this over with by Labor Day, according to Axios. Yes, we’ve heard this before. First it was late May-early June. Then it was July. Then it was we-don’t-quite-know-right-now. Also worth noting: There is a big difference between hope and expect.
Indeed, when we asked sources last month about when to expect a deal, they were reluctant to say anything, given the frequent delays.
All of which pretty much means everything we expected when this thing emerged in January: Subway is a difficult sale. It has always been a difficult sale. And the current environment only makes matters worse. Here’s why:
Subway is still losing units in the U.S. The chain’s restaurants make low unit volumes and low profits. This has led to the closure of some 6,000 restaurants over the past eight years.
While those closures have slowed, they have not stopped. The company is taking numerous efforts to keep franchisees from closing locations, such as asking operators for their full sales and earnings reports before approving such steps. But closures continue. It closed 571 restaurants last year, the lowest number since the closures started. And that was still nearly 500 more than any other chain closed last year, according to Technomic.
Buyers are reticent to acquire chains that are shrinking that much to begin with. Also, unit volumes remain low. Consider: Unit volumes increased 7% last year to $466,000, the highest level in a decade. But that’s still the same level as 10 years ago. Those volumes should be a lot higher now.
It’s like trying to sell a used car with a transmission problem. You’ll be able to sell it. But it’ll take some doing to convince the buyers that it’s fixable. And it’ll be difficult to get the price you want. All of this is why the brand keeps pumping out announcements on its sales and on its various improvement efforts. It needs to convince buyers things are improving. They are. Subway was just a real problem and has a long way to go. Even in a great M&A market, it was a tough sell.
The financing environment is not great. In case you’ve been under a rock, you know that the U.S. Federal Reserve has been aggressively raising interest rates to get inflation out of the system. It’s working, I think. And it may or may not push us into a recession (I’m betting it does not because all the economists now think it won’t).
But one way or the other, a high interest rate environment has this annoying tendency to influence the prices buyers are willing to pay. Oh you want $10 billion for your shrinking restaurant chain? Have you looked at interest rates lately?
What’s more, lenders remain rather reluctant to get into the space. And they see the Subway numbers, too, by the way. It’s why JP Morgan is helping things along with a reported financing plan.
Where are the strategic buyers? Lastly, we get to the strategic buyer situation. They just aren’t there. Roark may own a lot of restaurant chains, but it is still a financial buyer. And even it has to get past the whole, we-already-own-a-sandwich-chain thing.
Restaurant Brands International isn’t buying, especially now. Yum Brands, which makes all kinds of sense for Subway in a normal environment, also isn’t buying because Subway is about 1,000 times too big for what it’s willing to do. Nobody else has really emerged as a strategic buyer, at least publicly.
Strategics can pay more for a deal because they have a longer time horizon and more access to capital, at least theoretically. The biggest restaurant deals in history (Tim Hortons, Dunkin’) have been strategic acquisitions. Private equity firms can’t just up and throw out 11-figure deals like that, not without an awful lot of math. And the math on Subway is just really difficult.
Not that it won’t necessarily get done. There seems to be a real desire on Subway’s part to get a deal done, and it’s not as if chains like this go up for sale all that often. It’s just not a slam dunk.