Quiznos' value skyrockets

$1.5 billion or higher asking price draws ire of ex-shareholders

David Milstead, Rocky Mountain News

Friday, December 16, 2005

Four years ago, Quiznos' management took the company private, telling shareholders the sandwich chain was worth about $25 million.

Today, the company is on the block with a suggested price of $1.5 billion to $2.3 billion, according to reports in The Wall Street Journal and The New York Times.

How can the company's value change that quickly? Quiznos' former public shareholders, some of whom continue to challenge the buyout in court, say it's further evidence that the 2001 buyout price wasn't fair.

"It validates what we were always saying," said Ed Sebesta, who had to accept $8.50 apiece for his shares four years ago. That got him $100,000.

Applying the apparent growth in Quiznos' value to his holdings, he'd have shares worth between $5.8 million and $9 million today.

"It's become a lot more obvious that it was an artificially controlled price by a group of people trying to take it private at a price much too cheap than what it was really worth," Sebesta, a Texas resident, said Thursday.

Quiznos General Counsel Patrick Meyers declined to comment Thursday.

The company, founded in 1981, has experienced huge growth. The sandwich chain had 18 locations when aviation attorney Dick Schaden and his son Richard purchased it in 1991. By 2000, the company had 1,000 restaurants. Today, it has more than 4,000 locations worldwide, primarily owned by franchisees. Quiznos makes its money by selling franchise rights, collecting franchise fees and selling food to those locations.

The Schadens took the company public in 1994, but its share price lagged. By 2000, the Schadens had a plan to go private, first offering $8 per share for anyone who would turn in their shares voluntarily.

In 2001, the Schadens, who then owned two-thirds of the company, announced a going-private transaction at $8.50 per share.

Shareholders revolted, citing Quiznos' position as one of the fastest-growing restaurant companies in the United States. William Fagan, a private investor, tried to make a counteroffer, but Quiznos' board rejected his entreaties. They cited the conditions he set and his lack of clear financing.

About 95 percent of shareholders not affiliated with the company voted against the deal, but the Schadens had the majority vote needed to close the deal.

A raft of lawsuits began, with Fagan and a small group of shareholders exercising "dissenters' rights" and seeking a new value for the company.

The now-private Quiznos continued defending the transaction that valued the company at about $25 million. In a December 2003 court filing, Quiznos' attorneys argued that the company's profits were falling below expectations because of increased expenses due to competitive threats from Subway, McDonald's and Arby's. "Looking forward, these trends are getting worse. . . . Forty percent of Quiznos' units are not breaking even, and same-store sales increases are down."

The company also argued that Quiznos' future growth prospects at the time of the going-private deal should not be considered.

"In short, while hindsight may be 2 0/20, consideration of Quiznos' alleged post-merger 'kick-a--' growth wouldn't increase the valuation of the company."

Denver District Judge Robert McGahey rejected the company's arguments, finding in January 2004 that the company's fair value was $32.50 a share. McGahey said it acted in "bad faith" when it offered shareholders $8.50 per share.

"The 'true status' of Quiznos as a company on the verge of a growth explosion was obviously known to the Schadens, but they told other shareholders little, if anything, about that potential growth explosion," McGahey ruled.

Shareholder Fagan declined to comment Thursday, citing a legal settlement with Quiznos.

The McGahey ruling threw a wrench in a separate class-action suit for shareholders who failed to properly dissent. Sebesta, the lead plaintiff in the class action, announced his opposition to the settlement, which called for the shareholders to get $12.90 a share.

Denver District Judge Morris Hoffman ratified the deal, saying the discrepancy was "the product of risks that the settling parties freely, knowingly and intelligently accepted."

Now, Sebesta and Kent Lazo, a Denver shareholder, are appealing that decision, arguing that plaintiffs' lawyers provided inadequate counsel.

Lazo's family had about 1,500 shares, worth $12,750 at $8.50 apiece but worth more than $1 million at the upper end of Quiznos' reported asking price.

He declined to express anger Thursday. "I felt elated. It provides proof supporting my belief all along, that the takeover offer was significantly undervalued."

David Milstead is finance editor of the Rocky Mountain News. He can be reached at milstead@RockyMountainNews.com or 303-892-2648.