Subway Sells for $10 Billion

Subway, which has been on the block for over a year, most likely will be sold to private equity for $10 billion. Financial firms will provide $5 billion in debt, making the move risky during an economic downturn. (These are the 30 oldest restaurant chains in America.)

Reuters reported the plan first and said that the nature of the deal could be altered over time. “This would involve borrowing using the royalties of restaurant franchises as collateral. That only works if the income is stable.”

Subway has the heft of McDonald’s and Starbucks, based on the number of locations but not on revenue. It has over 35,000 locations worldwide. Its revenue is $16 billion. Same-store sales rose over 12% last year.

McDonald’s has over 38,000 locations and annual revenue of just above $20 billion. It has a market cap of $215 billion. Starbucks has annual revenue of $32 billion and 34,000 locations. Its market cap is $131 billion.

Why is Subway worth so much less than its two competitors? Its revenue is lower. Importantly, its revenue per store is well below those of McDonald’s and Starbucks. That means its stores are much less efficient in delivering sales. This may be because they are franchises that make payments to Subway that are only part of their sales, instead of the company getting 100% of the revenue from each location.

Private equity firms have a way of buying companies and squeezing higher profits than they had before. It is hard to see how that will work with Subway. It would need to get the people who own franchises to put more and more of what they make into the hands of the parent company. There is already tension between Subway and its franchise owners, which makes that model unstable.

Sponsored: Find a Qualified Financial Advisor

Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.

Source: Read Full Article