NEW YORK, Aug 24 (Reuters) – Private equity firm Roark Capital agreed to buy Subway on Thursday, according to people familiar with the matter, valuing the U.S. sandwich chain at $9.55 billion, including debt, within its targets. Financial performance.
The deal marks the end of a bidding process that began in February and attracted interest from several private equity firms. Reuters reported on Tuesday about the so-called earn-out agreement, which was key to Roark getting the contract for the tunnel.
If the full contract price is to be paid, the tunnel’s cash flow will have to reach certain milestones in the two or so years after the contract closes, the sources said. Excluding proceeds, the deal is worth $8.95 billion, the sources said.
Although uncommon in the consumer and retail sectors, leveraged structures are increasingly being used in a challenging market for mergers and acquisitions as a way to reconcile price differences.
Sources said the arrangement helped bridge the gap in valuation expectations between Roark and the DeLuca and Buck families, which own the tunnel that started nearly 60 years ago in Connecticut.
Families expected more than $10 billion in revenue for Subway based on its strong brand and international growth, but the valuation was lower because private equity firms considered its U.S. business saturated.
Roark beat out a rival bidding group led by buyout firms TDR Capital and Sycamore Partners, with a final offer of $8.75 billion including and $8.25 billion without leverage, the sources said.
Roark, which owns other restaurant operators and franchises including rival sandwich chain Jimmy John’s, will pay Subway’s owners a breakup fee equal to 4% of the deal’s value if antitrust regulators scuttle the deal, a source said.
According to sources, the contractual relationship allows 12 months to complete the transaction.
Roark took the view that the restaurant market is too fragmented to raise competition concerns.
Jimmy John’s has more than 2,600 restaurants in 43 US states. Subway has more than 37,000 restaurants in more than 100 countries.
Roark and Subway, which announced the deal Thursday, declined to comment on the terms.
Roark currently controls Inspire Brands, the owner of restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.
Its experience will be helpful in helping restaurant brands grow, “especially in the U.S. market where it’s down from its peak a few years ago,” said Neil Sanders, managing director of market research firm Global Data.
Tax considerations were part of the calculus for selling the tunnel. That’s because co-founder Peter Buck’s estate, who passed away in 2021, donated his 50% stake in the privately-owned company to his philanthropic foundation in his will. It provides a shield from taxes on sale of shares.
Founded in 1965 by 17-year-old Fred DeLuca and his family friend Buck, Subway has been owned by the founding families since its first restaurant opened as “Pete’s Super Submarines” in Bridgeport, Connecticut.
The Milford, Connecticut-based company is restructuring its operations to deal with outdated decor and $5 deals for foot-long sandwiches that are eroding owners’ profits. In 2021, the chain launched a menu overhaul and a splashy marketing campaign, kicking off a turnaround plan that helped boost sales.
Subway, which has shuttered thousands of U.S. locations since 2016, said a year ago that it wanted to move away from its current base of small franchisees with one or two stores, which are family-run and sometimes infrequently removed.
The company sees a 9.85% increase in same-store sales in the first half of 2023. Its 12-month earnings before interest, taxes, depreciation and amortization were about $800 million, sources said.
JPMorgan Chase ( JPM.N ) and law firm Sullivan & Cromwell LLP advised Tunnel. Ball, 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 Roumiliotis and Marguerite Choi
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