Axios Pro Exclusive Content

Potential bidders circle troubled sandwich chain Subway

Image of a Subway sign

Photo: Joe Raedle/Getty Images

The auction for Subway continues as potential bidders, including private equity, conduct due diligence on the sandwich chain, a source familiar with the situation tells Axios.

Why it matters: Subway is one of the few restaurant businesses in an active sale process as the industry continues to face an uncertain operating environment.

Details: Subway has been in decline for a decade, and that's both the challenge and the opportunity, the source says.

  • The pro is that Subway is franchised, which means it doesn't have the risk of operating in an environment with higher food prices and labor scarcity.
  • The con is ... also that it's franchised, which means a smaller take of the profits, the source says.

Between the lines: In a franchise model, the owner rakes in 5% or 6% of sales as royalty payments, the source notes.

  • When you directly operate a location, you get 20% of that revenue in the form of cash flow.
  • "It's complicated and it's a turnaround," the source says of Subway.

What they're saying: "As a privately held company, we don’t comment on ownership structure and business plans," Subway said.

  • The economics of a fast-food or quick-service chain are attractive to sponsors, Craig Marcus, a capital markets partner at Ropes & Gray tells Axios.
  • “It's a classic PE investment opportunity in the sense that it's cash-flow positive, low CapEx, [and] you can easily lever the business,” he says of Subway.
  • Because of the franchise model, the business wouldn’t get all the revenues — but it would get royalties, which are pretty predictable, Marcus adds.

Catch up fast: The Peter and Carmen Lucia Buck Foundation recently announced that late company cofounder Peter Buck's will included instructions to give his 50% stake in Subway to the foundation, Axios' Dan Primack wrote.

  • This could mean Subway is nearing the end of a sale process that the WSJ recently scooped.

Separately, a number of acquirers looked at Wendy's during the involvement of activist Nelson Peltz's Trian Fund Management, but passed, the same source says.

The big picture: Subway noted a 9.2% increase in same-store sales, but the source says this may not be indicative of the company's health.

  • Revenues are spiking at many restaurant chains due to price increases, but margins and volumes are down given inflation and the labor crisis.

The bottom line: Last year was a bad year for restaurants, and the first half of 2023 is likely a continuation of that, the source says — and that will negatively impact dealmaking.

Wendy's did not respond to a request for comment.

Go deeper