Acquisitions firm Roark sets terms for $9 billion plus sources Subway deal

NEW YORK (Reuters) – Private equity firm Roarke Capital is leading the acquisition of the Subway restaurant chain for more than $9 billion after tying conditions to some windfall for the two families who own it, people familiar with the matter said. He said on Tuesday.

The sources said that these conditions, known as makaseb, delay the payment of part of the deal amount. For the price to be paid in full, the sources added, Subway’s cash flow would need to reach certain milestones within a specified period after the deal closed.

The previously unreported arrangement helped bridge the gap in valuation expectations between the DeLuca and Buck families who own Subway and the takeover companies competing for it, according to the sources.

The families put the Subway restaurant up for sale in hopes of fetching more than $10bn based on its strong brand and international growth, but private equity firms said it was worth less because they deemed their US business saturated.

A challenging financing market for leveraged buyouts amid high interest rates also affected the sale.

The sources said a consortium including TDR Capital, Sycamore Partners and the private equity arm of Goldman Sachs Group, which bid less than Roarke for Subway, also attached dividends to his bid. No further details of the proposed profit structures could be found out.

The sources said the consortium is seeking to convince Subway’s owners that the deal with Roark would face US antitrust risks given Roark’s ownership of other restaurant brands, including sandwich chain Jimmy John’s.

So far, the sources added, the families see the restaurant market as too fragmented for the Roarke deal to raise competition concerns. The sources said an agreement could be reached as early as this week.

The sources asked not to be identified because the matter is confidential. The Wall Street Journal reported Monday that Roark Capital is closing in on a deal to buy Subway for about $9.6 billion.

A Subway spokesperson declined to comment, while representatives for Roark and TDR did not immediately respond to requests for comment. Sycamore and Goldman Sachs declined to comment.

Earnings structures, while uncommon in the consumer and retail sectors, are increasing in frequency in a challenging market for mergers and acquisitions as a means of reconciling spreads.

Lingerie maker Victoria’s Secret & Co (VSCO.N) negotiated the acquisition of online startup Adore Me last year using a profit structure. It agreed to pay $400 million up front, with subsequent payments totaling between $80 million and $300 million subject to Adore Me’s financial performance two years after closing.

Menu repair

Founded in 1965 by 17-year-old Fred DeLuca and family friend Peter 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 that it wanted to shift away from its current base of small franchisees with just 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 earnings before interest, taxes, depreciation, and amortization were about $800 million, according to the sources.

Roark controls Inspire Brands, owner of Jimmy John’s, Arby’s, Baskin-Robbins, Buffalo Wild Wings, Dunkin’, Rusty Taco and SONIC Drive-In chains.

Champaign, Illinois-based Jimmy John’s has more than 2,600 restaurants in 43 states. Subway has more than 37,000 restaurants in more than 100 countries.

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