Private equity firm Roark Capital agreed on Thursday to buy Subway, in a deal that people familiar with the matter said values the US sandwich chain at up to $9.55 billion, including debt, subject to targets in its financial performance.
The deal marks the conclusion of a drawn-out auction that started in February and attracted interest from several private equity firms. Reuters reported on Tuesday on a so-called earn-out agreement that was key to Roark clinching a deal for Subway.
For the full deal price to be paid, Subway’s cash flow would need to reach certain milestones over a period spanning two or more years after the deal closes, according to the sources. Without the earn-out, the deal is worth $8.95 billion, the sources said.
Earn-out structures, while uncommon in the consumer and retail sector, are increasing in frequency in a challenging market for mergers and acquisitions as a way to reconcile price differences.
The sources said the arrangement helped bridge a gap in the valuation expectations between Roark and the DeLuca and Buck families that own Subway, which started up nearly 60 years ago in Connecticut.
The families were hoping to fetch more than $10 billion for Subway based on its strong brand and international growth, but the private equity firms countered it was worth less because they deemed its US business saturated.
Roark prevailed over a rival bidding group led by buyout firms TDR Capital and Sycamore Partners, whose final offer was for $8.75 billion including an earn-out, and $8.25 billion without, the sources said.
Roark, which owns other restaurant operators and franchises, including rival sandwich chain Jimmy John’s, will pay Subway’s owners a break-up fee equivalent to 4 per cent of the deal’s value should antitrust regulators thwart the deal, one of the sources said.
The deal contact allows for 12 months for the transaction to be completed, according to the sources.
Roark took the view that the restaurant market is too fragmented for the deal to raise competition concerns, the sources added.
Jimmy John’s has more than 2,600 restaurants in 43 US states. Subway has more than 37,000 restaurants in over 100 countries.
Roark and Subway, which announced the deal on 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.
