Few if any chains are subject to as much sale speculation as the sandwich giant Subway. That speculation first began six years ago after the death of cofounder Fred DeLuca and reappeared three years later after the departure of his sister, Suzanne Greco, as CEO.
They have reappeared again more recently following the death of DeLuca’s cofounder, Peter Buck.
The Milford, Conn.-based sandwich giant reiterated again on Monday, as it has in the past, that the company is not for sale.
That said, even if it was, such a deal would not be easy, especially now. Let’s take the issues one-by-one:
There are huge valuation questions. Any company can be sold at any point as long as the buyer and seller agree on a price. If a price is low enough, Subway would have plenty of potential suitors. If someone was willing to pay a high enough price, the current owners could be convinced to sell even if they didn’t want to. Price always matters in the end.
There is more to like about Subway than you think. It has no debt and generates a ton of cash and has no capital costs. It has a well-known brand name.
But its valuation is difficult. Subway has closed 16% of its global locations. Do you value the company based upon how many locations it has now, or how many it will have when it’s done? How do those closures affect total sales? Subway would likely want a price that reflects its brand name and its size, but buyers will look at those closures and have a different idea.
It has a lot of work to do. What’s more, there is this perception that the company has a long way to go to truly fix its business. It needs to close thousands more restaurants due to weak locations or weak franchisees or both.
The company is making a ton of changes. It has been moving away from the development agent model that drove much of its growth in the early 2000s. It is working to push stores into the hands of larger operators.
It has overhauled marketing and its executive team. It has updated its franchise agreement, which is leading many operators to pay higher royalties rather than agree to some of the company’s new requirements. And, as we said, it has closed restaurants.
Those changes appear to be bearing some fruit. Subway said that it is on track to generate $1 billion in sales over expectations this year. But its turnaround is not over yet and that makes it more difficult to value.
There are only so many buyers out there. Let’s assume that a Subway acquisition would take about $8 billion, which is a total guess on my part. There are relatively few buyers out there that can swallow that kind of deal.
The most obvious is a strategic buyer for whom multiples are apparently meaningless. But who? Restaurant Brands International—which was not as interested in Subway as many people say—is buying Firehouse Subs. Inspire Brands has a sandwich chain in Jimmy John’s. Perhaps Yum Brands, but it tends to prefer its concepts small, like Habit.
That leaves a private equity firm, but there are relatively few of those making deals in the restaurant business right now and even fewer willing to take on a big one like Subway. And there are those valuation concerns.
An IPO seems unlikely. Maybe the best strategy would be to take the company public. The markets are certainly open for restaurants and Subway has the kind of low-capital, franchise-heavy business model they love.
But CEO John Chidsey has said he doesn’t want to run a public company. And the public markets might be cool to a Subway offering given those closures and some of the valuation questions and the next big concern.
And then there are the ownership questions. The company will probably be sold eventually. Most family companies do end up getting sold, after all. And Subway did relatively little in the form of succession planning. This isn’t White Castle where there have been successive generations trained in the business, ready to take over.
But Buck’s death complicates that ownership and potentially delays any action.
Subway is a giant restaurant chain working on a turnaround with a complicated ownership structure and complicated business. Selling such a thing is not easy.