Dividends and Subway comes up with debt plan to clinch $10 billion sale

Every once in a while a food chain rises and soon people have tried it. Many continue and the chain expands and the family that started the chain wishes to sell out. Franchise operators such as McDonald’s is a public company, but many companies remain family owned and controlled. A franchise which many people have tried is called Subway, founded in 1965 by Fred Deluca and Peter Buck. Fortunately the families have adapted and remained in control since, but the families made the decision to sell.

Who are the buyers – private equity firms.

The appeal to the private equity firms are the royalties paid by each franchise. The term of this method is called Whole Business Securitization or WBS. The royalties expected can be used as collateral for bank loans. The private equity firms have access to credit and can borrow money, the future royalties paid down the debt and the private equity owns more of the firm. Eventually it can sell the asset or merge it with its other holdings in the food business.

When interest rates rose, the cost went up and the normal financing became a challenging environment. Subway retained JPMorgan Chase for assistance, and they came up with the solution of a $5 billion acquisition financing plan. The owners of Subway want a final price in the $10 billion range and with the loan, the private equity companies could come closer to the target price. Bids from the private equity firms came in between $8.5 billion and $10 billion.

The temporary financing would be replaced by the WBS method, however, to do the WBS method, a store-by-store due diligence by the rating agencies needs to be done and that can take up to a year. The idea being the private equity used JPMorgan and then refinance after 9 months with the WBS.

The remaining bidders are Bain Capital, TPG, Advent International, TDR Capital and Roark Capital. In the final round of bidding, the companies can team up if desired or go alone.

Linking to dividend paying stocks, when companies have streams of income there are possibilities that can happen. Although the stream of income can fluctuate, there are abilities to securitize the income streams to use debt financing. In similar fashion, if you are employed the bank can give you a loan based on you continuing to receive the income from the company. The important aspect is to have a stream of income, one method is to have regular dividends coming in which allows you to either reinvest or use the income for other purposes such as pay off debt. The best solution is always looking back, but having the option is a very good thing for your lifestyle balance.

There are more questions than answers, till the next time – to raising questions.


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