MTY Group is a serial buyer of restaurant chains and in recent months has seemed to be single-handedly keeping the merger and acquisition market afloat, with recent deals for BBQ Holdings and Wetzel’s Pretzels.
But company executives this week were lamenting the state of the market. “It’s not a super active market,” CEO Eric Lefebvre told analysts and investors on the company’s first quarter earnings call Wednesday, according to a transcript on the financial services site Sentieo/AlphaSense. “I think a lot of the sellers are seeing that the multiples are depressed and there’s not that many buyers out there.”
That should not come as too much of a surprise. Restaurant margins took a big hit last year, which alone can depress valuations. And interest rates are increasing, which is giving prospective buyers less financial capacity to make deals. Private equity firms that were once frequent shoppers of restaurant chains have all but disappeared. All of that has conspired to keep the market slow, with a few exceptions.
And there is apparently a big example of this playing out before our eyes in Subway. But don’t take our word for it. Let’s go back to Lefebvre.
“We’ve seen what happened with Subway,” he said. “They’re trying to get high value for their asset. And if a brand like Subway can’t do it, then maybe other people are going to think about it.”
There are two implications here: First, that Subway can’t get its asking price, and second, that it may have implications far beyond that sandwich giant.
Subway has publicly said it is on the market. But reports in the months since then have suggested its asking price is coming down.
Early reports in January, for instance, suggested a $10 billion asking price. The New York Post later suggested the price was more like $8 billion. More recently, the Post said the price could fall to $7 billion. It’s the type of falling sale price that hints at a difficult market.
Subway is in a unique position. It’s a rare instance in which one of the country’s 10 largest brands is put on the market. Its brand remains a household name. And there is plenty of international growth to be had. It has also made improvements of late.
But it has a lot of small-scale franchisees with weak unit volumes who have closed thousands of locations in recent years. And it may have missed its most opportune window to find a buyer. Some companies that could swallow the company and drive up the price are either uninterested (Yum Brands) or they have a sandwich concept (Inspire Brands, Restaurant Brands International).
There are reportedly plenty of private equity firms interested, but they are traditionally not in the business of driving up acquisition multiples. The potential inclusion of some international buyers could drive up the price some.
Both Subway’s founders, Fred DeLuca and Peter Buck, have died, with Buck passing the company to his foundation. The company is likely eager to find a buyer in this case.
But the other question is whether this freezes the market. If Subway doesn’t fetch a strong price, other potential sellers may wait it out until valuations improve. And then serial acquirers like MTY may have to wait it out, too.
“It’s certainly not a seller’s market right now,” Lefebvre said. “So what we’re seeing is multiples becoming a little bit more reasonable, but people are being a little more cautious about maybe waiting for a few months or a few years to see how the market evolves before they sell their company.”