Aug 24 – Subway would sell itself to private equity Roark Capital for $9.55 billion after agreeing to attach conditions to some of the windfall the two families that own it will get, sources said, ending a long-drawn auction that saw several competing bids.

These conditions, known as an earn-out, defer payment on part of the deal consideration, the sources familiar with the matter said.

For the full price to be paid, Subway’s cash flow would need to reach certain milestones over a specified period after the deal closes, they said.

The deal was valued at $8.95 billion, excluding the earn-out target, sources said.

Roark beat out a late challenge from a rival bidding group led by TDR Capital and Sycamore Partners, which submitted a final bid of $8.75 billion or $8.25 billion excluding an earn-out, according to people familiar with the matter.

The arrangement helped bridge a gap in the valuation expectations between Roark Capital and the DeLuca and Buck families that own Subway, according to the sources.

Subway, which has roughly 37,000 restaurants in more than 100 countries, did not disclose the terms of the deal on Thursday.

The deal will make Roark Capital one of the largest restaurant operators in the world. It controls Inspire Brands, the owner of restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.

“Roark brings more to the table than other investors would have,” said Neil Saunders, managing director of GlobalData.

Its experience of helping restaurant brands grow will be helpful, “especially in the U.S. market where it remains well below the peak it hit a few years ago”, he said.

Subway said in February it was exploring a possible sale, drawing interest from private equity firms including Roark, Advent International, TDR Capital and TPG as well as Goldman Sachs’ asset management arm.

The restaurant chain had then hoped to fetch more than $10 billion, owing to its strong brand and international business. But the buyout firms countered that it was worth less as they deemed its U.S. business saturated.

Owned by its founding families since its first outlet opened in 1965, Subway had for several years struggled with competition from rivals until it revamped its menu and increased marketing spend in 2021.

Those efforts seem to be paying off as Subway’s same-store sales in North America rose 9.3% in the first half of 2023.

Roark and Subway have 12 months to close the deal, which has a 4% breakup fee, sources said. The fee covers the possibility of antitrust regulators thwarting the deal.

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