Subway’s financial advisor JPMorgan Chase & Co is offering private equity firms vying for the sandwich chain a $5bn debt financing package to support a successful acquisition.
The $5bn package is comprised of loans and bonds and is based on a mix of financing options equivalent to 6.75 times Subway’s 12-month earnings before interest, taxes, depreciation and amortisation of around $750m.
The deal’s size is expected to show buyout firms that they can borrow enough to structure an attractive deal, even at Subway’s $10bn-plus valuation. JPMorgan’s debt package offers the option of a preferred equity component with a roughly 15% interest rate.
Second-round bids for Subway from more than 10 private-equity firms came in last week, with bids ranging between $8.5bn and $10bn.
Subway has been exploring a sale since February 2023 and JPMorgan’s is hoping its debt package will overcome a challenging environment for leveraged buyouts and fetch the company’s asking price.
Long-term financing through whole business securitisation
A cheaper option for a private-equity buyer of Subway would be to finance the acquisition long-term through a whole business securitisation (WBS) using royalties of restaurant franchises as collateral.
However, arranging financing through WBS requires store-by-store due diligence by ratings agencies, which can take more than a year.
Bidders would have to rely on JPMorgan’s debt package or arrange their own financing to clinch a deal with Subway, then refinance through a WBS scheme later. Barclays is one of the banks in discussions about long-term financing.
Subway has been revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that eroded franchisees’ profits.