NEW YORK, Aug 24 (Reuters) – Private equity firm Roark Capital on Thursday agreed to buy Subway. People familiar with the matter said the U.S. sandwich chain values the U.S. sandwich chain at up to $9.55 billion, including debt, subject to financial performance targets set therein.
The deal marks the conclusion of a lengthy auction that began in February and has attracted interest from several private equity firms. Reuters on Tuesday reported an earn-out agreement that was pivotal in Roark striking a deal for Subway.
According to the sources, Subway’s cash flow would need to meet certain milestones over a period of two or more years after the deal closes in order to pay the full deal price. Excluding the earn-out, the deal is valued at $8.95 billion, the sources said.
While earn-out structures are uncommon in the consumer and retail sectors, they are increasingly being used in a demanding M&A market to offset pricing differentials.
The sources said the agreement helped fill a gap in valuation expectations between Roark and the DeLuca and Buck families, who own Subway, which was founded in Connecticut nearly 60 years ago.
The families hoped Subway’s strong brand and international growth would make it more than $10 billion, but the private equity firms countered that it was worth less because they felt US business was saturated.
Roark prevailed against a competing bidder group led by buyout firms TDR Capital and Sycamore Partners, whose latest offer was $8.75 billion including earn-out and $8.25 billion excluding earn-out, they said the sources.
Roark, which owns other restaurant operators and franchises including rival sandwich chain Jimmy John’s, will pay Subway’s owners a break-up fee of 4% of transaction value if antitrust authorities smash the deal, one of the sources said.
According to the sources, the deal contract provides for a period of 12 months for the transaction to be completed.
Roark believed the restaurant market was too fragmented for the deal to raise competition concerns, the sources added.
Jimmy John’s has more than 2,600 restaurants in 43 states. Subway has more than 37,000 restaurants in over 100 countries.
Roark and Subway, which announced the deal Thursday, declined to comment on the terms.
Roark currently controls Inspire Brands, owner of restaurant chains such as Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.
His experience of helping restaurant brands grow will be helpful, “particularly in the US market where the company is well below where it peaked a few years ago,” said Neil Saunders, chief executive of market research firm GlobalData.
transformation processes
Tax considerations were part of the Subway sale considerations. Because the estate of the co-founder Peter Buck, who died in 2021, donated his 50% share in the private company to his charitable foundation as part of his will. This provides protection against tax when selling the share.
Founded in 1965 by 17-year-old Fred DeLuca and family friend Buck, Subway has been owned by the founding families since opening their first restaurant as Pete’s Super Submarines in Bridgeport, Connecticut.
Based in Milford, Connecticut, the company transformed its operations to deal with outdated decor and $5 foot-long sandwich deals that were eroding franchisee profits. In 2021, the chain embarked on a menu overhaul and a high-profile marketing campaign while embarking on a turnaround plan that has helped drive sales growth.
Subway, which has closed thousands of U.S. locations since 2016, said a year ago that it wants to break away from its current base of small franchisees, who own just one or two stores, mostly family-run and sometimes struggling to make ends meet come.
The company reported a 9.85% increase in same-store sales in the first half of 2023. According to the sources, 12-month earnings before interest, taxes, depreciation and amortization are around $800 million.
JPMorgan Chase (JPM.N) and the law firm Sullivan & Cromwell LLP have advised Subway. Paul, Weiss, Rifkind, Wharton & Garrison LLP advised Roark Capital while Morgan Stanley led the acquisition financing.
Reporting by Anirban Sen and Abigail Summerville in New York and editing by Greg Roumeliotis and Marguerita Choy
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