The auction for the sandwich giant Subway, which has been taken place all year long, appears to be heading into its final weeks, at least according to one report.
Bloomberg reported late last week that about a half-dozen bidders remain in the running for the chain, including Inspire Brands and Focus Brands owner Roark Capital and TDR Capital, the investment firm that owns EG Group, a large convenience store operator out of the U.K. that also operates numerous Subway restaurants.
Once it does end, it will conclude one of the most public auctions for a restaurant chain in recent history, and certainly one rarely this big.
Subway was first said to be looking at a potential sale in a January piece in the Wall Street Journal. One month later the company sent out its own release confirming that it was, indeed, for sale. Reports have come from almost everywhere listing potential buyers, mostly private equity groups.
At one point the price tag was said to fall to $7 billion, only to have a subsequent report indicate that there was plenty of interest and $10 billion is realistic, albeit with some financing from adviser JP Morgan. John Chidsey, Subway’s CEO, dismissed concerns that high interest rates and a lack of strategic buyers could temper the market, saying at our Restaurant Leadership Conference that this is a great time to sell because nothing else is out there.
Yet the auction is taking some time to complete. It was expected to be over by now, but that timeline according to the Bloomberg piece is now July 4.
What’s more, that price tag has indeed come down, to $9 billion.
In fairness, Subway is a big and complex chain and a long process can be expected. But the public nature of the auction and the activity surround it also reveal issues with the company and its historic performance.
Subway has struggled at a historic level to keep restaurants open. Some 6,000 U.S. restaurants have shut down since 2015—more restaurants than any restaurant chain in history, though that’s more an indicator of just how prevalent the chain’s locations had become.
Even last year, when its unit volumes increased 8.3% to their highest level in a decade, franchisees closed nearly 600 restaurants, according to data from Restaurant Business sister company Technomic.
Subway, for its part, has worked furiously at a turnaround. Just this morning, it announced a 4,000-unit development agreement in China, a key market if the chain is indeed planning to become as big internationally as companies like McDonald’s and KFC. It has overhauled its menu, then overhauled it again, and is now doing even more menu work by adding slicers.
It also launched a Pickleball Club sandwich.
It has argued along the way that its sales continue to improve and has provided regular updates as such, including reporting its 11.7% first-quarter same-store sales growth.
Still, as many other brands are experiencing, the sales aren’t as profitable as operators would want. And that is causing some problems with The Turnaround Plan.
Subway is eager to bring in large, multi-unit operators and in April said it signed five such deals. But doing so has proven to be difficult, given concerns about its unit volumes and profitability, something we’ve noted for a while. This morning, Reuters reported a similar issue.
As for the auction, the most glaring weakness is the lack of strategic buyers. Subway’s well-known global brand and its massive size should warrant a massive payday from one of the major strategic buyers that might be willing to fold that business and its enormous cashflow into theirs’. Those buyers would also be willing to pay multiples in the high teens into the 20s range.
Those strategic buyers are either no longer in the market for a sandwich chain (Restaurant Brands International, Inspire Brands) or they’re into small deals (Yum Brands). As such, only private equity groups and their debt-loving, short-term investment horizons are interested in the company. Given interest rates and their general reticence to pay any multiple of note, that has likely kept the price tag to a minimum.