Bankers extend a $5B acquisition financing plan for Subway

The bankers overseeing the sale process for Subway have offered a $5 billion acquisition financing plan to the private equity firms looking to acquire the company. The financing plan seeks to overcome hurdles in leveraged buyouts and secure the company an asking price of over $10 billion.

Bankers offer a $5B acquisition financing plan for Subway

There has been a notable increase in interest rates and concerns about an economic downturn. These events have affected the sale for Subway that was announced in February. The rising interest rates have made debt increasingly expensive and less available to buyout firms looking for deals.

The bids for Subway have ranged between $8.5 billion and $10 billion. The financial adviser for the sandwich chain, JPMorgan Chase, has now set up a $5 billion debt financing package that will show buyout firms that they can borrow enough to come up with an ideal deal even at a valuation of more than $10 billion.

The debt financing plan comes alongside loans and bonds, with its size being 6.75 times the 12-month EBITDA of around $750 million. However, this deal might not be the preferred solution as potential buyers might prefer a whole business securitization (WBS) involving borrowing with the royalties of restaurant franchises that will be used as collateral.

WBS finance needs store-by-store due diligence by rating agencies, which usually takes over a year. The bidders must use JPMorgan’s debt package or arrange financing to secure a deal with Subway. They will later refinance using a WBS scheme in the future.

The financing package offered by JPMorgan has an option for a preferred equity feature with an interest rate of around 15%, which is costly to the buyer. Subway allows bidders to employ any financing route they want, but they should show they can secure committed financing.

Last week, more than ten private-equity firms placed second-round bids for Subway. Subway has already dropped low bids and is currently sifting through the final pool of bidders. Some private equity firms participating in the bidding process include Advent International Corp, Bain Capital, Goldman Sachs’ buyout division, Roark Capital, and TDR Capital.

Renovations at the restaurant

Subway is a sandwich chain founded in 1965 by Fed DeLuca and a family friend known as Peter Buck. Over the years, the company’s ownership has remained with the founding families.

The chain has around 37,000 locations globally, and it is shifting away from the traditional reliance on franchises to consolidating locations using fewer and larger franchises with adequate capital.

Earlier this month, Subway released a statement saying that comparable sales globally had increased by 12.1% in Q1, and there was also an increase in guest visits. The company has also been faced with increased competition from rivals. Some private equity firms looking to purchase Subway have previously invested in the restaurant industry.