A little over a year ago, the Subway franchisor entity, Doctor’s Associates Inc. was finally able to get itself sold to ROARK, the huge private equity group. With one of the longest M&A cycles—9 months– known in the restaurant space, and with over 70 investors signing and looking at the Book either not being interested or bidding too low, a floor purchase price of $8.995 billion plus another $600 million in terms of earnout was finalized There was a valuation gap between seller and buyer, hence the earnout, based on future cash flow performance. The EBITDA multiple was not announced, but the best belief is that it was in the 11-12X range.
The problem is that US Subway conditions are not getting any better. While sales/per unit (AUV) were said to be up in 2023, recently the SSS was confirmed to be down 10-15%, depending on region. While a whole new sandwich platform in the US was developed in 2023, Subway discounted the new items immediately. Currently, every sandwich is discounted via a $6.99 LTO national app offer.
While discounting is common in US QSR operations, Subway has always been a heavy discounter. The current offer discounts the whole menu at one time, which is very unusual. To counter franchisee angst, we understand that Subway Corporate is noting there is no variable labor or OPEX associated with discounted sales, to justify the low selling price. [That notion is incorrect]. See the New York Post report.
In addition to the impact of more franchisees closing [Subway lost 7000 units over 2015-2023; a 25 unit franchisees closed in August in Oregon due to very low sales and unit EBITDA], the Subway entity must service principal and interest outlays on the $8.995 acquisition. We can assume ROARK won’t want to inject more cash into the deal if Subway runs short.
Subway’s current foundational problems were decades in the making. Common sense Restaurant Management 101/301 level practices can help them to dig out.
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