Will the Famed Sandwich Chain Go Public?

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By Joseph Cafariello

Friday, October 4th, 2013

To get a better price when you sell your car, you would naturally clean it up a little, inside and out. Maybe get some new mats and such. And of course, you’d get the engine nicely tuned.

President and co-founder of the internationally successful Subway sandwich shops, Fred DeLuca, is doing much the same with his restaurants, trimming expenses and beefing up the returns.

Is there a potential sale on the horizon? An IPO, perhaps?

Absolutely, franchisee lawyer Michael Garner stressed to the New York Post back in 2011. This could mean hes preparing to sell the company.

This has yet to happen, but investors have continued to watch closely. And industry watchers believe Subway would cook up a very appetizing public offering.

Taking it to the Limit

When Fred DeLuca opened his first Subway store in Bridgeport, Connecticut in August 1965, it was supposed to be just a means of earning some extra income to cover his medical school expenses. This explains the companys name, Doctors Associates Inc. which DeLuca founded with a colleague physician.

But life had a different calling for DeLuca. As his restaurant business grew, so did his ambitions. By 1974, he and his partner had a chain of 16 stores throughout Connecticut. Their hunger not yet satiated, they began franchising, ultimately growing their company into the largest submarine sandwich chain in the world, currently with 40,372 locations in 103 countries.

Such rapid expansion was made possible by adopting a development program where sales agents receive a percentage of the royalties from each store for which they find franchisees. But after nearly 40 years of franchising, some agents are finding their territories are becoming rather saturated.

Paul Landino, the companys development agent in Manhattan, Bronx, Westchester, Rockland, and parts of Connecticut, was opening stores at the rate of 30 to 40 per year back in 2011. And at 490 restaurants, Landino he had informed the New York Post. We can stay on track for a few more years. But then it will taper down.

Changes to the companys development program is hinting that saturation may be on the minds of the chains owners as well, as agent contracts are shortening in length, and many are no longer being extended when they expire.

Since the typical share of royalties handed to agents amounts to a full third, the elimination of agents would add 50% to the companys share from each store. This makes the companys returns that much more enticing, leading many industry analysts to suspect the company will be sold in the future.

What a Tasty IPO it Would Be

If Doctors Associates Inc. were to take the Subway chain public, it would certainly make investors salivate. Averaging roughly $480,000 in annual sales per restaurant, the 40,372 stores combine for over $18 billion a year in gross revenues.

By comparison, Yum Brands Inc. (NYSE: YUM) owner of KFC, Pizza Hut, and Taco Bell reported only $13.6 billion in gross revenues in 2012 from its 39,000 restaurants. In its ten years as a public company, YUMs stock has grown from $15 to over $70 today, excluding dividends.

And experts are declaring the time is ripe for IPOs. Just this past Q3 alone, 60 companies have gone public, twice as many as last years third quarter. So far, 2013 is on pace to be the busiest year for public debuts since 2000.

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Why? Probably because the equity market just keeps roaring higher and higher, with investors throwing their money at just about everything. This Q3s spotlighted debutants include FireEye (NASDAQ: FEYE) rising 80% on its first day trading, Rocket Fuel (NASDAQ: FUEL) and Foundation Medicine (NASDAQ: FMI) storming out of their gates 90% to 100% higher, and Sprouts Farmers Market (NASDAQ: SFM) beating all of them with a 123% first day jump.

Even within the quick-service sandwich space, IPOs are finding hungry investors. Potbelly Sandwich Shops offering due out this morning originally set for $9-$11 a share was raised to $12-$13 on Wednesday, and then raised again to $14 yesterday, so reports the Wall Street Journal. Even before debuting, the company increased its take by some 28% just on the percolating enthusiasm in the IPO market of late. It popped 130% Friday morning.

Kept Under Wraps

Subways IPO, then, would certainly be one to look for. Although you wont get that from the company. There have been no changes to our corporate structure, a Subway spokesman denied to the New York Post. And since then, there have still been no indications of a public offering.

But just two years ago it was shortening contracts and not replacing retiring agents. And there was every indication of a sale coming. Is it possible the company will start to make moves in this IPO-friendly environment?

Joseph Cafariello

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