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DENVER – The troubled Quiznos sub sandwich chain is now living up to predictions made last August by Blue MauMau that majority shareholder Avenue Capital is enlisting the services of top firms to pave a legal way to financially restructure the franchisor as its sandwich chain implodes.
Wall Street Journal reported yesterday that Quiznos is again trying to restructure its debt for the second time in two years, as it continues to decline financially as it loses franchised stores. It said, “The Denver-based chain, known formally as QIP Holder LLC, which acquired a hefty debt load as part of a leveraged buyout in 2006, is negotiating with creditors—who have hired bankers and lawyers—to restructure some or all of its roughly $600 million debt load, people familiar with the matter said.”
The Journal said those talks have led to a forbearance agreement with creditors to give Quiznos more time to work on the deal. One person close to the matter was quoted saying that the franchising company missed a payment on a loan. Its latest agreement now allows Quiznos to maintain liquidity as negotiations with its lenders progresses. “Such agreements generally involve creditors not taking action against the company, such as postponing or reducing debt payments for a specified time,” he explained.
Restaurant unit economic analyst John Gordon of San Diego-based Pacific Management Consulting Group said with these latest developments it is now clear that Quiznos did not reduce its debt enough back in 2011. With the franchisor missing its financial standards, and with this current round of pre-Chapter 11 negotiations with lenders, the analyst feels the chain is deteriorating. “It is a continued indicator that Quiznos’ franchise business model is unsustainable,” Gordon said.
The WSJ reported that Quiznos did not make a required payment on a loan. Gordon explained, “This indicates Quiznos’ cash is really low, or the company did it deliberately to trigger a default and then work a forbearance agreement. In either case, this is worse than its 2011 situation where Quiznos breached its covenant ratios but at least was able to continue to make its debt service payments.”
In a memo sent out to franchisees on Wednesday, CEO Stuart Mathis said, “We have reached an agreement with our lenders and equity partners, and look forward to continuing to work constructively together to establish a framework that will position Quiznos and our franchisees for future growth and success.”
WSJ reported that those efforts follow “an out-of-court restructuring deal with creditors in early 2012 that shaved its debt by more than a third to approximately $570 million. That resulted in hedge fund Avenue Capital Group taking majority ownership.
Quiznos current state of affairs
While the WSJ stated that Quiznos has gone from its peak of 5,000 stores to 2,100, the March 2013 Franchise Disclosure Document now shows 1,935 traditional units at the end of 2012, with 1,815 remaining open through the year. There are another 626 stores that have either left the chain or not communicated with headquarters. Quiznos is projecting only 26 new units for the next fiscal year.
In a quick analysis of the 2013 FDD, Blue MauMau shows Quiznos had approximately 383 SNOs (stores sold but not opened) at the beginning of 2012, and 172 by year’s end. These are owned by franchisees, who paid their initial franchise fee of approximately $20k to $30k and were given 12 months to find a location or lose their franchise. There are an additional 138 SNOs that have either left the system or not communicated with Quiznos.
Regarding litigation for 2012, the latest disclosure document reports 106 lawsuits for the required 10-year period. Quiznos shows 23 pending litigations and 83 completed lawsuits. In those completed, Quiznos discloses that it paid approximately $38 million to franchisee plaintiffs in settlements. That amount excludes the $6 million cash Quiznos paid out to franchisees in the 2010 national class action settlement of $206 million. The $6 million was covered by insurance.
Franchisees are notifying Blue MauMau of closures in their states. One anonymous store owner, who is in the process of closing down his locations, said he believes the most profitable Quiznos owners are now only making minimum wage when you consider the hours they are working. But he adds, “I would estimate 75% of owners are not taking a wage and are losing money on top of that. Ironic that a year ago franchisees personally asked Stuart Mathis when he was going to fix the broken business model. He out and out told us the business model was not broken.” The franchisee added, “It's going to get ugly out there for the remainder of the year.”