Business Essentials for Professionals


Roark Capital To Spend Up To $9.55 Billion To Acquire The Sandwich Business Subway

Roark Capital To Spend Up To $9.55 Billion To Acquire The Sandwich Business Subway
In a deal that, according to persons familiar with the situation, could value the American sandwich company at up to $9.55 billion, including debt, subject to targets in its financial performance, private equity firm Roark Capital agreed to purchase Subway on Thursday.
The agreement marks the end of a protracted auction that got underway in February and drew interest from a number of private equity groups. On Tuesday, Reuters published information about an alleged earn-out contract that Roark used to seal a deal for Subway.
According to the sources, Subway's cash flow would need to meet specific benchmarks over a period of two or more years after the sale complete in order for the whole deal price to be paid. According to the sources, the deal would be worth $8.95 billion without the earn-out.
Even though earn-out structures are uncommon in the consumer and retail sector, they are becoming more common in a competitive M&A market as a means of bridging pricing discrepancies.
According to the sources, the agreement helped close a valuation expectation gap between Roark and the DeLuca and Buck families, who own Subway, which was founded in Connecticut over 60 years ago.
Based on its strong brand and foreign expansion, the families were hoping to sell Subway for more than $10 billion, but the private equity groups objected that it was worth less since they believed its U.S. market to be saturated.
According to the sources, Roark outbid a competing bidder group led by the buyout firms TDR Capital and Sycamore Partners, whose last offer was for $8.75 billion with an earn-out and $8.25 billion without.
According to one of the sources, Roark, which also owns rival sandwich chain Jimmy John's and other restaurant operators and franchisees, will pay Subway's owners a break-up fee equal to 4% of the deal's worth in the event that antitrust regulators block the merger.
The sources said that the agreement contract gives the transaction a 12-month window to be completed.
According to the sources, Roark believed that the restaurant industry was too fragmented for the transaction to raise concerns about competition.
In 43 U.S. states, Jimmy John's has more than 2,600 locations. More than 37,000 Subway locations can be found in more than 100 nations.
Roark and Subway, who made the deal public on Thursday, chose not to comment.
Current owner of restaurant franchises Jimmy John's, Arby's, Baskin-Robbins, and Buffalo Wild Wings is Roark's Inspire Brands.
"Especially in the U.S. market where it remains well below the peak it hit a few years ago," said Neil Saunders, managing director of market research firm GlobalData, "its experience of helping restaurant brands grow will be helpful."
Tax factors entered into the decision to sell Subway.
This is due to the fact that co-founder Peter Buck's estate, who passed away in 2021, stipulated in his will that his philanthropic organisation receive a 50% ownership interest in the privately owned corporation. This provides protection from taxes on the stake's sale.
Since its first restaurant debuted as 'Pete's Super Submarines' in Bridgeport, Connecticut, in 1965, Subway has been owned by the founding families. Fred DeLuca, then 17 years old, and his family friend Buck founded the company.
The Milford, Connecticut-based business has been making changes to its operations to address outmoded furnishings and $5 foot-long sandwich specials that reduced franchisee revenues. The chain began a turnaround plan that has helped sales increase in 2021 with the launch of a new menu and a blitzy marketing campaign.
Subway, which has shut down tens of thousands of outlets across the United States since 2016, stated a year ago that it wanted to move away from its present base of tiny franchisees that operate just one or two stores, are frequently family-run, and frequently struggle to make ends meet.
In the first half of 2023, the company's same-store sales increased by 9.85%. The sources estimate the company's earnings before interest, taxes, depreciation, and amortisation to be roughly $800 million over the course of a year.
Subway received legal counsel from Sullivan & Cromwell LLP and JPMorgan Chase (JPM.N). Roark Capital received advice from Paul, Weiss, Rifkind, Wharton & Garrison LLP, and Morgan Stanley oversaw the financing for the acquisition.

Christopher J. Mitchell

Markets | Companies | M&A | Innovation | People | Management | Lifestyle | World | Misc