NEW YORK, April 30 (Reuters) – Bankers running the sale process for Subway have given private equity firms vying for the sandwich chain a $5 billion acquisition financing plan, hoping to weather a challenging environment for leveraged buyouts and get the company’s asking price of more than $10 billion, people familiar with the matter said.
Interest rates have been rising and concerns about an economic slowdown have increased since Subway said in February it was exploring a sale, making debt more expensive and less available for buyout firms. chasing deals. It weighs how much private equity firms are offering to buy companies.
So far, bids for Subway have been between $8.5 billion and $10 billion, one of the sources said. Subway’s financial adviser, JPMorgan Chase & Co ( JPM.N ), now hopes a $5 billion debt financing package it has put forward will show buyout companies they can borrow enough to build an attractive deal even at a $10 billion-plus valuation, the sources said.
The debt financing is based on a mix of loans and bonds and is valued at 6.75 times Subway’s trailing 12-month earnings before interest, taxes, depreciation and amortization of approximately $750 million, added sources.
It is possible that this financing will only serve as a temporary solution. This is because a cheaper option for a private-equity buyer of Subway is likely to finance the long-term acquisition through a so-called whole business securitization (WBS), sources said. This involved borrowing using the royalties of restaurant franchises as collateral.
WBS financing requires store-by-store due diligence by rating agencies that can take more than a year. Bidders would have to rely on JPMorgan’s debt package or arrange their own financing to secure a deal with Subway, and then refinance through a WBS scheme down the line, the sources said.
Barclays Plc (BARC.L), a major player in the market for WBS financing, is one of the banks in discussions about long-term financing, the sources said.
Milford, Connecticut-based Subway is revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that are hurting franchisees’ profits. In 2021, the chain launched a menu overhaul and fun marketing campaign as it embarked on a turnaround plan that helped boost sales.
JPMorgan’s financing package also offers the option of a preferred equity share with an interest rate of about 15%, the sources said. It is a more expensive route that private equity firms may not choose, three of the sources added.
To be sure, Subway allows bidders to use any funding route they want, as long as they can demonstrate they can get the committed funding.
Second-round bids for Subway came in last week from more than 10 private equity firms, one of the sources said, adding that Subway dropped the low bids and eliminated a group of finalists. bidder. Bain Capital, TPG Inc ( TPG.O ), Advent International Corp, TDR Capital, Goldman Sachs Group Inc’s ( GS.N ) buyout arm and Roark Capital are among the private-equity firms participating in the auction, according to the sources. .
Subway will soon allow bidders to pool together before submitting final offers, and Bain, TPG and Advent have already held talks about doing so, the sources added.
The sources requested anonymity because details of the sale process are confidential. Bain, TPG and Advent declined to comment. TDR and Roark did not immediately respond to requests for comment. Subway, JPMorgan, Goldman Sachs and Barclays declined to comment.
Founded in 1965 by 17-year-old Fred DeLuca and family friend Peter Buck, the company has been owned by the founding family since its first restaurant opened as “Pete’s Super Submarines” in Bridgeport, Connecticut.
The chain, which has nearly 37,000 locations worldwide, is moving away from its traditional reliance on franchisees who own only one or two locations and is instead consolidating locations with fewer and more large, well-capitalized franchisee.
Subway reported earlier this month that global comparable sales were 12.1% higher in the first quarter and that guest visits were up, driven in part by restaurant renovations. It faces growing competition from rivals such as Jimmy John’s, Firehouse Subs ( QSR.TO ), Jersey Mike’s Subs and Potbelly Corp ( PBPB.O ).
TPG and Bain were part of a group that owned Burger King when John Chidsey, now CEO of Subway, headed that burger fast-food restaurant chain. Advent, for its part, has invested in restaurants including Bojangles and café operator First Watch. TDR operates grocery retailer ASDA and gas station conglomerate EG Group.
Reporting by Abigail Summerville and Anirban Sen in New York Editing by Greg Roumeliotis and Matthew Lewis
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