SUMMARY

• Private equity firms offered a $5 billion financing plan to buy Subway
• Bids for the sandwich chain range from $8.5 to $10 billion
• Whole business securitization could be the most attractive long-term financing option

In an attempt to score a $10 billion deal for Subway, the bankers behind the scenes are offering private equity firms a tempting $5 billion financing plan. With interest rates rising and economic slowdown concerns growing, the current climate isn't exactly ideal for leveraged buyouts. Nevertheless, the show must go on.

Bids for the sandwich empire have been rolling in between $8.5 billion and $10 billion, and JPMorgan Chase & Co is trying to prove that there's enough dough (pun intended) for an attractive deal even at a $10 billion-plus valuation. Their $5 billion debt financing package is based on a mix of loans and bonds, equivalent to about 6.75 times Subway's 12-month earnings.

But this debt financing could just be a temporary solution. A better option for private equity buyers might be financing the acquisition through a whole business securitization (WBS), which involves borrowing using restaurant franchise royalties as collateral. However, WBS financing requires store-by-store due diligence that can take over a year.

Subway, founded by 17-year-old Fred DeLuca and his pal Peter Buck back in 1965, has been working hard to revamp its operations. They've launched a menu overhaul and a flashy marketing campaign as part of a turnaround plan that has already seen sales grow. Meanwhile, global comparable sales have risen by 12.1% in the first quarter, thanks in part to restaurant renovations.

While Subway is giving bidders the freedom to choose their financing route, second-round bids from over 10 private-equity firms have come in, and the pool of final bidders is being narrowed down. Some firms, like Bain, TPG, and Advent, have even been in talks about teaming up before submitting their final offers.

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