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Quiznos Strikes Deal on Debt Restructuring

Quiznos Lower Price Every Day Campaign 2009
Quiznos 2009 marketing campaign, "Lower prices every day." photo/AR McLin

DENVER - After struggling with slumping sales and a recent violation of debt terms, Quiznos has now struck a deal with Avenue Capital Group, a hedge fund controlled by billionaire Marc Lasry.The troubled sub-sandwich chain is making a last ditch effort to get creditors to support its debt-restructuring deal, hoping to avoid a Chapter 11 bankruptcy-protection filing.

Today, the Wall Street Journal reported that people familiar with the matter are saying Avenue Capital would convert debt to equity and invest cash in Quiznos as part of a tentative deal . . . giving the hedge fund more than a 70 percent ownership stake in the chain.

“The plan would reduce Quiznos' roughly $875 million in debt by about $281 million,” the WSJ reported. Quiznos plans before the end of the year to ask other creditors to support the deal or force them to go along with it in a prepackaged bankruptcy. Creditors will have about 30 days to decide whether to accept the deal.”

Quiznos’ owners, private equity firm CCMP Capital Advisors LLC and Consumer Capital Partners, an investment firm owned by Rick Schaden, are unlikely to get any recovery on their investments, the report states.

As a distressed-debt investor, Avenue Capital will likely try to gain control of the franchisor by purchasing discounted debt and later convert it to equity, which carries more risk but could result in greater reward.

Spokespeople for Quiznos and Avenue declined to comment for the WSJ report, as did Consumer Capital and CCMP.

Restaurant analyst John Gordon of Pacific Management Consulting Group gave Blue MauMau his perspective on today’s developments.

Gordon said with total debt falling $281 million and senior secured debt holders receiving only a $75 million initial payment from Avenue Capital, this likely will go down as one of the worst private equity investments in the restaurants space, based on the total debt write down.

He also observed, “Quiznos is not out of the woods yet. With debt falling $281 million, $594 million in debt still has to be supported.  Avenue Capital is seeking other cost reductions—Denver headquarters rent relief, deferred compensation reductions and changes to reduce store level franchisee broker expense.”  

Gordon said it seems CCMP, CCP and the Schaden family will be out of their day-to-day roles going forward.  He said, “I'd particularly watch what new management does with franchisee supply chain markups, as that was a significant reason, along with low store level sales ($430,000 in 2003/2004, down to approximately $325,000 now), why Quiznos franchisee level profits were so poor, and why so many franchisee stores closed.”    

Kevin Tackett, president of the Quiznos Independent Franchisee Association said the franchise association and the franchisee body are hopeful that this gets done sooner than later. “We’ve been told by current management that the new ownership, under the new restructuring, will offer stability to do a lot of marketing and new planned campaigns. Right now under current management, we’ve been told there are a lot of things we can’t do. So, everyone in the franchise body is extremely anxious to get this done.


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About Janet Sparks

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Janet Sparks is the former publisher of the Continental Franchise Review, an industry newsletter that covered the franchise community for over 30 years. She has also been a columnist for a leading franchise magazine for the past 13 years. Today she is an independent journalist who engages in investigative reporting, tackling complex issues that impact the franchise industry.

Janet can be reached at jsparks@bluemaumau.org or at 303-799-7398.