The death of a nuclear physicist who co-founded Subway Restaurants has thrown the fast-food giant’s future into doubt, with dealmakers fretting that hopes to sell the struggling chain look more complicated than ever.
Peter Buck — whose $1,000 loan to Fred DeLuca in 1965 to start a sandwich shop in Bridgeport, Conn. launched a global fast-food empire that made him a billionaire — died last week at the age of 90, the company said.
What’s less known is the fact that Subway earlier this year held informal talks to possibly sell itself to Restaurant Brands International, the Brazil-based owner of Burger King, sources close to the situation said. Those talks fizzled, the sources said, culminating in Restaurant Brands’ move last week to instead buy Subway’s smaller sandwich competitor Firehouse Subs for $1.1 billion.
Negotiations with Subway had fallen apart, insiders said, partly because of disagreements on price — not only between Restaurant Brands and Subway, but also between Buck and co-founder DeLuca’s widow, Elisabeth. Each controlled 50 percent of the chain since DeLuca’s death in 2015, and one of them — it wasn’t clear which — had been holding out for a higher price than the other, according to a source close to the situation.
A Restaurant Brands spokesman said the company bought Firehouse Subs partly because of its “significant growth potential.” As for Subway, the company said it doesn’t “comment on market speculation or rumors.” Subway declined to comment specifically when asked about the talks with Restaurant Brands. Instead, it said it remains focused on a turnaround.
“Subway is not for sale,” a company spokesperson said in a statement. “Sales momentum has steadily been building since the beginning of 2021 and the launch of Subway’s Eat Fresh Refresh campaign this summer accelerated that momentum. We expect to exceed our sales projections in 2021 by more than $1 billion.”
Some dealmakers are skeptical, noting that Subway two years ago hired John Chidsey to be its first permanent chief executive. Chidsey’s most notable achievement, they say, may have been his stint as CEO of Burger King, which culminated in the chain getting sold in 2010 to Restaurant Brands.
Since taking the reins at Subway, Chidsey has squeezed franchisees for cash, raising fees and tightening lease restrictions — moves that can typically precede a sale. Now, however, dealmakers say the thinking of Buck and DeLuca’s heirs remains a mystery.
“This throws a wrench into the sale,” one source said of Buck’s death last week, noting that Buck was a widower. “Now the shares might be tied up in probate.”
DeLuca, who ran the company for more than half a century, did little succession planning. His sister, Suzanne Greco, took the CEO job after his death but stepped down in 2018 after a rocky tenure. DeLuca’s son Jonathan is a director on the board but has no operational role at the company. Ditto for Buck’s son Christopher, who runs the media nonprofit Retro Report.
“No one knows what is in his will,” a dealmaker close to the situation added of Buck. “Sounds like the Subway sale process is on indefinite hold.”
With Restaurant Brands out of the picture, Subway’s sale prospects look dimmer. Roark Capital’s Inspire Brands, 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 an outside possibility, but conventional wisdom is that buying Subway would drag down its stock price, sources said.
Now the most likely buyer would be a private equity firm like TPG Capital, which would likely pay a lower price than a major fast-food operator, dealmakers familiar with the situation said.
“I think it is private equity,” a source close to the situation said. “And I don’t think sponsors would pay a big multiple.”
Sources briefed on the mega-franchise’s business — whose nearly 22,000 locations nationwide generated $634 million in royalty fees last year, down from $834 million in 2019 — say it would likely fetch between $8 billion and $10 billion in a sale.
That’s a far cry from the $50 billion valuation that Subway had privately been eyeing as it prepped for a possible initial public offering in 2012, according to sources.
That also was before former spokesman Jared Fogle’s 2015 conviction on child-porn and sex crime charges. Meanwhile, Subway since has been slammed with bad publicity over its food, including accusations that its bread contained chemicals found in yoga mats; reports that its processed chicken contained sawdust; and this year a lawsuit that alleges it has been selling fake tuna.
Subway in 2014 changed its bread recipe after the yoga-mat flap, but has consistently defended its chicken and tuna.
In May 2012, Subway said it had over 25,000 US restaurants and it was growing at a quick pace. Now, that number is lower than 22,000, with more than 1,000 net closings a year for the last several years as many franchisees lose money.
There are potential positives to Subway waiting to begin a formal sales process or even listing its shares, insiders said. The 56-year-old chain recently started producing audited financials for the first time. Under DeLuca, the chain had more than one hundred related entities, making it hard to fully understand, a source said.