NEW YORK (Reuters) – Private equity firm Roarke Capital on Thursday agreed to buy Subway, in a deal people familiar with the matter said would value the U.S. sandwich chain at up to $9.55 billion, including debt, subject to policy objectives. Financial performance.
The deal marks the conclusion of a long auction that began in February and attracted interest from several private equity firms. Reuters reported on Tuesday the so-called earnings agreement that was key to Rourke’s deal for Subway.
For the deal price to be paid in full, Subway’s cash flow will need to reach certain milestones over a period of two years or more after the deal closes, according to the sources. The sources said that without the gains, the value of the deal is $8.95 billion.
Profit structures, while uncommon in the consumer and retail sectors, are increasingly occurring in a challenging market for mergers and acquisitions as a means of reconciling spreads.
Sources said the arrangement helped bridge the gap in valuation expectations between the Roark, DeLuca and Buck families that own Subway, which began nearly 60 years ago in Connecticut.
The families had hoped to bring in more than $10 billion for Subway based on its strong brand and international growth, but the private equity firms countered that it was worth less because they deemed their US business saturated.
The sources said Roarke outperformed a rival group led by acquisitions firms TDR Capital and Sycamore Partners, whose final bid was $8.75 billion including dividends and $8.25 billion without.
Rourke, who owns restaurant operators and other franchises including rival sandwich chain Jimmy John’s, will pay the Subway owners a breakup fee equal to 4% of the deal value if antitrust regulators thwart the deal, one of the sources said.
Contacting the deal allows 12 months to complete the deal, according to the sources.
The sources added that Rourke saw the restaurant market as too fragmented for the deal to raise concerns about competition.
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 on Thursday, declined to comment on the terms.
Rourke currently controls Inspire Brands, which owns restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.
Neil Saunders, managing director of market research firm GlobalData, said its experience helping restaurant brands grow would be beneficial “especially in the US market where it is still well below its peak a few years ago”.
Tax considerations were part of the calculus for selling the Underground. This is because estate co-founder Peter Buck, who died in 2021, donated his 50% stake in the privately owned company to his charity under the terms of his will. This provides a tax shield on the sale of the stake.
Founded in 1965 by 17-year-old Fred DeLuca and his family friend Buck, Subway has been family owned since opening its first restaurant, “Pete’s Super Submarines” in Bridgeport, Connecticut.
The Milford, Connecticut-based company is revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that have eroded franchisees’ profits. In 2021, the chain launched a menu overhaul and slick marketing campaign as it embarked on a turnaround plan that helped grow sales.
Subway, which has closed thousands of US locations since 2016, said a year ago it wanted to shift away from its current base of small franchisees with one or two stores, which tend to be family-run and sometimes barely make ends meet.
The company saw a 9.85% increase in same-store sales in the first half of 2023. Its 12-month EBITDA amounted to about $800 million, according to the sources.
JPMorgan Chase and the law firm Sullivan & Cromwell LLP advised Subway. Paul, Weiss, Rifkind, Wharton & Garrison LLP advised Roark Capital, and Morgan Stanley led the acquisition financing.
(Reporting by Anirban Sen and Abigail Somerville in New York and Deborah Sophia in Bengaluru) Editing by Greg Romeliotis and Margarita Choi
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