Subway Chain Acquired by Roark Capital for $9.5 Billion

Subway boasts over 37,000 restaurants across more than 100 countries.

Private equity firm Roark Capital has reached an agreement to acquire Subway, the renowned U.S. sandwich chain, in a deal that sources familiar with the matter value at up to $9.5 billion, inclusive of debt. The completion of this deal follows a protracted auction process that began in February and attracted attention from multiple private equity firms. The utilization of an earn-out agreement proved pivotal in securing Roark’s deal for Subway.

The full valuation of the deal will be contingent on Subway’s cash flow attaining specific milestones over a span of two or more years post-closure, sources reveal. Excluding the earn-out stipulation, the deal is valued at $8.95 billion. Earn-out structures, though relatively uncommon in the consumer and retail sector, are gaining traction as a means to reconcile discrepancies in valuation in the current challenging M&A landscape.

This unique arrangement played a crucial role in bridging the gap between Roark’s valuation and the expectations of the DeLuca and Buck families, who have owned Subway since its inception nearly six decades ago. While the families had aspired for a valuation surpassing $10 billion, some private equity firms assessed the brand’s value as lower due to perceived saturation in its U.S. operations.

Roark Capital emerged triumphant over a competing consortium led by buyout firms TDR Capital and Sycamore Partners. The rival offer from TDR Capital and Sycamore Partners encompassed $8.75 billion with an earn-out provision and $8.25 billion without.

Roark, a holder of other restaurant franchises including sandwich chain Jimmy John’s, will provide Subway’s owners with a breakup fee equivalent to 4% of the deal’s value if antitrust regulators obstruct the agreement.

The deal’s contract encompasses a 12-month period for its finalization. Roark’s perspective is that the restaurant market’s fragmentation would mitigate any competition concerns.

With more than 2,600 establishments across 43 U.S. states, Jimmy John’s is another subsidiary under Roark Capital’s control. In contrast, Subway boasts over 37,000 restaurants across more than 100 countries.

While both Roark and Subway have refrained from commenting on the deal’s terms, Roark presently holds Inspire Brands, which oversees various restaurant chains including Arby’s, Baskin-Robbins, and Buffalo Wild Wings.

Roark’s expertise in nurturing restaurant brands is anticipated to be beneficial, particularly in the U.S. market where Subway’s performance has yet to regain its peak from previous years.

Tax considerations played a role in Subway’s decision to sell. Following the passing of co-founder Peter Buck in 2021, his estate donated his 50% stake in the privately owned company to his charitable foundation. This strategy served as a safeguard against taxes associated with the stake’s sale.

Founded in 1965 by Fred DeLuca and family friend Peter Buck, Subway’s ownership has remained with the founding families since its inception in Bridgeport, Connecticut. The company, headquartered in Milford, Connecticut, has initiated operational improvements to address outdated décor and profit challenges faced by franchisees.

Subway has been actively repositioning itself through menu overhauls and strategic marketing campaigns to drive growth. In a bid to evolve, the chain aims to shift away from its reliance on small franchisees operating only one or two outlets, a segment often family-run and financially strained.

Throughout the first half of 2023, Subway recorded a 9.85% surge in same-store sales. Its trailing 12-month earnings before interest, taxes, depreciation, and amortization stand at around $800 million.

JPMorgan Chase and the law firm Sullivan & Cromwell LLP have been advising Subway, while Roark Capital has received counsel from Paul, Weiss, Rifkind, Wharton & Garrison LLP. Morgan Stanley has led the acquisition financing efforts. In a transformative move for both entities, Roark Capital’s acquisition of Subway signifies a step toward restructuring and rejuvenating the iconic sandwich chain’s operations and growth trajectory.