At a meeting on its corporate campus in Milford, Conn., last February, shortly after Subway laid off some 300 people with assistance from local police, CEO John Chidsey told employees that the company’s shareholders wanted to turn the brand around and own it for a long time.
While not completely dismissing the notion of a sale in “five years, 10 years,” he said it was “not true” that Subway was being “gussied up for sale,” according to a recording of the meeting provided to Restaurant Business.
That hasn’t stopped rumors about a potential sale from spreading, especially among franchisees and others connected with the brand. The publication Business Insider highlighted such rumors last week, but they’ve been out there for some time.
Subway itself intensified that speculation when the company said it would move some of its headquarters functions to Miami, the same city that houses Burger King and Popeyes, part of Restaurant Brands International—long thought of as a potential buyer of the sandwich giant. Inspire Brands has also been mentioned, though it remains unclear to me why the owner of Arby's and Jimmy John's would buy yet another sandwich concept.
All that said, a Subway acquisition by RBI or anyone else is complicated and unlikely, at least anytime soon. The reason is rooted in valuation. Subway’s shareholders, including cofounder Peter Buck and the family of the late cofounder Fred DeLuca, would likely want a price far bigger than anyone would be willing to pay. Assuming they even want to sell.
Let’s take the issue point by point.
Subway is perceived to be cheaper than other fast-food chains. Any major national fast-food brand over the past five years has had a sky-high valuation as consumers shifted toward convenience options. The pandemic has done almost nothing to stop that, and if anything valuations soared even further.
Take, for instance, a Papa John’s. If you want to take them out, you can expect to pay a price equal to somewhere around 25 times 2020 earnings before interest, taxes, depreciation and amortization (EBITDA), based on current valuation, according to data on the financial services site Sentieo. That’s, um, high.
Subway, which is privately held and struggling, could be theoretically purchased for a much smaller multiple. The buyer would turn the brand around, reinvigorate international growth and cash in all those high-profit franchise royalties the brand collects. As such, any company considering the acquisition of a major fast-food brand looks at taking a run at Subway.
There’s a lot of anecdotal evidence. Sources have told Restaurant Business in the past that RBI at least looked at Subway, for the reason stated above. But there is also the Miami move, which brings the companies closer together. Chidsey used to work at Burger King before it was sold to 3G Capital. And RBI’s current CEO, Jose Cil, once worked for Chidsey at Burger King. RBI doesn’t have a sandwich brand and is always on the lookout for something to buy.
Subway is clearly cutting costs, a common strategy before a company is put on the market, as to improve its ultimate sale price.
But anecdotal evidence is only anecdotal and just because a brand is perceived as cheap doesn't mean it actually will be.
But the company is in a tough spot. Subway has been struggling since 2013, shortly after it ended its $5 Footlong promotion, and largely under the weight of its immense presence. The company aggressively added units, often forcing franchisees to open stores close to their existing locations under the threat of a different operator moving there. There were Subway restaurants everywhere, and now many are closing.
In 2015 Subway peaked at 27,103 locations. Today it has 22,005. That’s a closure rate of 19% in just five years.
The company’s franchisee base is loaded with small-scale operators at restaurants with remarkably low unit volumes—just $365,000 per year, or about half of the volumes of its biggest competitors in the sandwich space, according to data from Restaurant Business sister company Technomic.
The prospect that Subway has to shrink further still—it remains the most prevalent restaurant chain in the world—likely means buyers are concerned that growth could be a long way off.
Subway's roller-coaster decade
Source: Technomic
There are other complications. Subway is not growing in international markets, which is surprising given the general strength of U.S. brands overseas. At least part of that was due to a historic aversion of the brand to selling to international operators of other fast-food concepts, a requirement Chidsey quickly dismissed last year. Still, buyers can’t easily count on international growth the way 3G did with its original purchase of Burger King or later deals for Tim Hortons and Popeyes.
But Subway also has its development agents in the U.S., which have historically been responsible for inspecting stores—which sometimes generates complaints of conflicts of interest, as sometimes those agents end up taking over terminated stores for themselves.
The sandwich sub-sector is shockingly weak right now. Subway wasn’t the only sandwich chain to struggle last year. Indeed, outside of Jersey Mike’s, Arby’s and Firehouse Subs, no sandwich chain in the Top 100 generated sales growth last year.
To be sure, this was the pandemic, which likely hurt many of those brands’ core markets temporarily. But problems at Subway in theory should have been a boon to its biggest competitors rather than the other way around. Concerns about the sandwich business could frighten away potential buyers who don’t see long-term growth in the business.
Valuation concerns always keep deals from happening. Add all this up, and you have a brand that is already struggling, with franchisees who are angry and in a weak position, operating in a sector that itself appears to have some general challenges, and you have a business with a low perceived value.
The shareholders have had plenty of opportunities to sell over the past few years but haven’t—meaning they probably don’t want to. But differences in opinion on the valuation of a company are always the biggest sticking point in getting a deal done. The shareholders have no need to sell right now, so if the price isn’t right why do it?
That said, this could always change. Someone could offer up a price that gets the shareholders to sell. Or frustration with the brand’s performance could prompt a change as well. And though Subway appears for now to be a massive challenge, we’ve seen that before at Burger King and Arby’s and both chains turned around nicely.
But for now, at least, we wouldn’t count on a Subway sale.