Happy MoneyFitt launch day!

📝 Focus

• Subway Sandwich Swallowed Whole

📊 In the Markets

• Nvidia Nergy

• ARM's race

• China China China

📖 MoneyFitt Explains

🎓 Franchise Me, Franchisee

📝 Focus

Subway Sandwich Swallowed Whole

Privately-owned Subway, the franchisor 🎓 for the QSR (quick-service restaurant) chain bearing its name, is close to a buyout by Roark Capital, a restaurant-focused private equity (PE) firm. Roark has been competing with other US buyout firms like Sycamore Partners and TDR (considering a joint bid), TPG and Bain but seems close to winning with a bid of about $9.6bn, according to the WSJ. Valuations aren't disclosed, but a comparable listed company might be $22bn Restaurant Brands International (clue is in the ticker, which actually is “QSR”), founded in 2014 through the merger of Burger King and Canada's Tim Hortons, and includes Popeye's and Firehouse Subs (a fast-growing Subway competitor) with over 28,000 restaurants in more than 100 countries. Another comp is $36bn Pepsi spinoff Yum! Brands, with 55,000 restaurants across 155 countries selling KFC, Taco Bell and Pizza Hut, all global leaders in their categories, most of which operate as franchises. They trade at 21x and 26x historical earnings. Category leader $200bn McDonald's also trades at 26x, with 40k outlets in 118 countries.

..... ▷ Through its Inspire Brands unit, Atlanta-based Roark also owns roast beef QSR Arby’s (2011, $430mn) and casual diner Buffalo Wild Wings (2017, $2.9bn) plus stakes in burger chains Hardee’s and Carl’s Jr. In pandemic-ridden 2020, it swooped on Dunkin’ Brands, the Nasdaq-listed owner of the Dunkin’ Donuts and Baskin Robbins chains, in an all-cash deal worth $11.3bn, including debt. It was priced at $106.50 a share, about 20% above the “undisturbed” share price (meaning before word leaked out of the deal.)

..... ▷ Founded in 1965 as "Pete's Super Submarines" in Connecticut by 17-year-old Fred DeLuca and his friend Peter Buck, Subway has been owned by their families ever since and now has 37,000 restaurants running in over 100 countries. But the sale of Subway, proposed in January, has been complicated by its decline in the US, marked by 6,000 restaurant closures since 2015, including 500+ in 2022 (the year it was roasted on HBO), along with net closures of international locations as well. The result was ceding Subway’s status since 2011 as the world’s largest restaurant chain (by unit count) back to McDonald’s.

..... ▷ Same-store sales have increased for 10 straight quarters, and for the first half of this year, they rose 9% in North America on revamped menus, better marketing and remodelled restaurants, though franchisees claim that was largely through price hikes. Perhaps new stablemate Dunkin’ will share its partnership with TikTok star Charli D’Amelio to keep up the momentum?

📊 In the Markets

Nvidia Nergy: On Monday, Nasdaq surged over 1% for its best day in almost four weeks, almost entirely thanks to an 8.5% rally in Nvidia, driven by traders expecting Wednesday's results to be higher than expected (see below, and yes, Wall Street professionals really do think that way), lifting other tech stocks in its wake. The relatively tech-light and inexplicably still-followed Dow Jones Industrials index edged down. US sovereign bonds continued to dip, driving 10-year Treasury yields up to hit 2007 GFC highs amid unease before the Jackson Hole Symposium of central bankers later in the week. In order to stay listed on the New York Stock Exchange by trading at over $1 per share, WeWork will hold a 1-for-40 reverse stock split, i.e. for every 40 shares you own, you will receive one new share theoretically priced at 40x the old share. Especially in the age of fractional investing, the concept of such limits or pretty much anything based on absolute share prices is rather archaic (see Dow Jones above.) Last week, the company recently expressed “substantial doubt” about its ability to stay in business, cue a 70% 2-day meme stock rally that has since reversed. Cloud computing firm VMware surged 4.9% after UK antitrust regulators cleared Broadcom's acquisition, while Broadcom itself gained 4.8%, possibly implying that the market sees it as a synergistic buy. Goldman Sachs dipped 0.9% following news it may offload part of its wealth business.

..... ▷ Tech giant Nvidia's 8.5% surge on Monday was fueled by investor optimism that the chip designer will provide quarterly revenue guidance (which is basically a company forecast, which highly-paid analysts will use as the central estimate for their own forecasts) above current estimates when it reports its results on Wednesday. After tripling in value this year as the key play on the rise of ChatGPT and other generative artificial intelligence applications, Nvidia may have little room for any earnings-related disappointment or any guidance other than something above its previous guidance and what is currently priced in by Wall Street's Finest. It's a very high bar. Looking at price divided by the trailing 12-month "TTM" earnings, the sum of the last 4 reported quarterly results, to get a sense of growth expectations that the market is pricing in, NVDA is trading at 243X. There's more to a historical P/E ratio than that, but it's a rough guide. Lattice trades at 61x, ASML at 33x, AVGO (Broadcom) at 26x, TSMC at 15x and Samsung Elec at 13x. (On the other hand, Intel and fierce rival AMD were loss-making on a TTM basis.)

ARM's Race

UK chip designer Arm has filed a preliminary prospectus for its hotly-anticipated Nasdaq listing with ticker ARM, targeted for next month. It also confirmed a 1% fall in annual revenues to end-March from the slowdown in smartphone sales, with the quarter to end-June even worse, down 2.5%. Not a great look for an IPO, but Arm is moving into segments that are still booming, such as cloud computing (networking and CPUs, and through these, peripherally in AI) and could be the most valuable company to IPO in the US since Rivian’s $70bn in 2021, potentially even surpassing Uber's $75bn valuation in 2019. (RIVN closed Monday down 73% from its IPO price and 88% down from its all-time high, with Uber doing much better at about flat on IPO and -29% from ATH.)

..... ▷ Reuters has reported that SoftBank plans to sell about 10% of Arm's shares in the IPO, having bought it for $32bn in 2016. It was valued at $64bn in an internal transaction after SoftBank bought back a 25% stake from its Vision Fund unit. The listing should give a much-needed boost to the IPO market, with online grocery delivery service Instacart, marketing automation firm Klaviyo and 249-year-old uber-stylish sandal-maker Birkenstock, bought by LVMH's PE firm in 2021 for €4 billion ($4.8 billion), all expected to IPO in the coming month.

..... ▷ Arm's business model is to develop chip technology which it licences out to chipmakers for an upfront fee plus a royalty on each chip sold. The name was originally an acronym for Acorn RISC Machine ("reduced instruction set computing"), named after parent Acorn Computers, a British computer company in the 1980s that some say was more technologically advanced than its American rival (guess who) but less successful, and which had disappeared by the turn of the century. It was renamed Advanced RISC Machines when formed as a JV with VLSI and Apple Computer (yes, it was them), who didn't want the name of their then-rival in it.

China China China: In yesterday's MFM, we wrote that the People’s Bank of China, the central bank, was "expected to announce cuts to borrowing costs for businesses and households, which would probably only really be strongly positive if large (i.e. more than 0.15%). What investors have been waiting for is for Beijing to act on the promises of monetary, regulatory and fiscal stimulus made less than a month ago, and which already seem a distant memory." Well, the cuts were 0.10% for the 1-year rate linked to business loans and no cut at all for the 5-year rate linked to household and mortgage lending. Underwhelming to say the least, especially with more soft data coming out, such as land sales revenues falling for a 19th straight month and overall fiscal revenue growth slowing in July. Foreigners sold Chinese stocks via the HK/China Stock Connect for the 11th day straight on Monday, selling nearly $1bn.

..... ▷ The PBOC's hands are partially tied by the ongoing weakness in the CNY, which it had instructed state banks to actively support all last week. Some expect the PBOC to step in directly by selling US Treasuries. China and Japan (also facing a slumping currency) are the two largest foreign central bank holders of US Treasuries, and expectations of potential central bank currency support are part of the reason yields have shot up.