The death of a nuclear physicist who co-founded Subway Restaurants has cast doubt on the future of the fast food giant, with negotiators worried that hopes of selling the struggling chain seem more complicated than ever.
Peter Buck – whose $ 1,000 loan to Fred DeLuca in 1965 to open a sandwich shop in Bridgeport, Connecticut, launched a global fast food empire that made him a billionaire – died last week at age 90 years old, the company said.
What is less well known is the fact that Subway had informal talks earlier this year about possibly selling to Restaurant Brands International, the Brazilian owner of Burger King, sources familiar with the situation have said. Those talks collapsed, the sources said, culminating in Restaurant Brands’ decision last week to instead buy Subway’s smaller competitor, Firehouse Subs, for $ 1.1 billion.
Negotiations with Subway collapsed, insiders said, in part because of price disagreements – not only between Restaurant Brands and Subway, but also between Buck and co-founder DeLuca’s widow, Elisabeth. Each had controlled 50 percent of the chain since DeLuca’s death in 2015, and one of them – it was not known which – had resisted a higher price tag than the other, according to a source familiar with the matter.
A spokesperson for Restaurant Brands said the company bought Firehouse Subs in part because of its “significant growth potential.” As for Subway, the company said it was “not commenting on market speculation or rumors.” Subway declined to comment specifically when asked about talks with Restaurant Brands. Instead, he said he remained focused on a turnaround.
“The metro is not for sale,” a company spokesperson said in a statement. âSales momentum has grown steadily since the start of 2021 and the launch of Subway’s Eat Fresh Refresh campaign this summer has accelerated that momentum. We plan to exceed our sales forecast in 2021 by more than $ 1 billion. “
Some negotiators are skeptical, noting that Subway hired John Chidsey two years ago to be its first permanent general manager. Perhaps Chidsey’s most notable achievement, they say, was his stint as CEO of Burger King, which resulted in the chain’s sale in 2010 to Restaurant Brands.
Since taking the reins at Subway, Chidsey has squeezed franchisees for cash, raising fees and tightening rental restrictions – steps that can usually precede a sale. Now, however, negotiators say the thought of Buck and DeLuca’s heirs remains a mystery.
âThis throws a key in the sale,â a source said of Buck’s death last week, noting that Buck was a widower. âNow the actions could be tied to probate. “
DeLuca, who has run the business for over half a century, has done little succession planning. His sister, Suzanne Greco, took over as CEO after his death, but stepped down in 2018 after a difficult tenure. DeLuca’s son Jonathan is a director on the board but has no operational role in the company. Ditto for Buck’s son Christopher, who runs the non-profit outlet Retro Report.
“Nobody knows what’s in his will,” added a negotiator close to Buck’s situation. “Looks like Subway’s sales process is on indefinite hold.”
With restaurant brands out of sight, Subway’s sales outlook looks weaker. Inspire Brands of Roark Capital, which owns Sonic and Buffalo Wild Wings, had been the other most logical buyer, but it acquired Subway competitor Jimmy John’s in 2019. Yum, owner of Taco Bell and KFC, is still a possibility. external, but conventional wisdom is that buying Subway would lower its share price, sources say.
Now the most likely buyer would be a private equity firm like TPG Capital, which would likely pay a lower price than a large fast food operator, negotiators familiar with the situation said.
âI think it’s private equity,â said a source familiar with the situation. “And I don’t think the sponsors would pay a big multiple.”
Sources familiar with the mega-franchise’s business – whose nearly 22,000 sites nationwide generated $ 634 million in royalties last year, up from $ 834 million in 2019 – say it would likely pay off. between $ 8 billion and $ 10 billion in a sale.
That’s a far cry from the $ 50 billion valuation Subway privately envisioned as it prepared for a possible IPO in 2012, sources say.
It was also before the 2015 conviction of former spokesperson Jared Fogle of child pornography and sex crimes. Meanwhile, Subway has since come under fire with bad publicity for its food, including accusations that its bread contained chemicals found in yoga mats; reports that his processed chicken contained sawdust; and this year a lawsuit alleging he sold fake tuna.
Subway in 2014 changed their bread recipe after the yoga mat flap, but still stood up for their chicken and tuna.
In May 2012, Subway said it has over 25,000 restaurants in the United States and is growing at a rapid rate. Now that number is below 22,000, with over 1,000 net closings per year over the past few years as many franchisees lose money.
There are potential bright spots for Subway as they wait to begin a formal sales process or even list their stocks, insiders said. The 56-year-old chain recently began producing audited financial statements for the first time. Under DeLuca, the chain had more than a hundred related entities, which makes it difficult to fully understand, a source said.