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Subway to be Sold to Roark Capital for $9.55 Billion with Earn-Out Conditions

In a major deal, Subway, the global restaurant chain, is set to sell itself to private equity firm Roark Capital for a whopping $9.55 billion. This acquisition comes with certain conditions known as an earn-out, which defers part of the payment until Subway’s cash flow reaches specific milestones over a designated period after the deal is finalized. The full price of $8.95 billion, excluding the earn-out target, was reported by sources familiar with the matter.

Roark Capital emerged as the winner in a competitive auction that saw a last-minute bid challenge from a rival group led by TDR Capital and Sycamore Partners, with a final offer of $8.75 billion or $8.25 billion excluding the earn-out. The inclusion of earn-out conditions in the deal helped bridge the valuation expectations between Roark Capital and the DeLuca and Buck families, who are the owners of Subway.

This acquisition will make Roark Capital one of the largest restaurant operators globally, adding to its existing portfolio of restaurant chains, which includes Jimmy John’s, Arby’s, Baskin-Robbins, and Buffalo Wild Wings under the umbrella of Inspire Brands.

The expertise and experience that Roark Capital brings to the table are expected to benefit Subway significantly, especially in the U.S. market, where it has seen a decline in performance in recent years. Neil Saunders, managing director of GlobalData, highlighted Roark’s track record in helping restaurant brands grow and noted that this expertise would be particularly valuable for Subway.

The deal marks a significant transition for Subway, which has historically been owned by its founding families since its inception in 1965. The decision to explore a possible sale was announced by Subway in February, attracting interest from various private equity firms and financial institutions. While Subway had initially aimed for a valuation of over $10 billion, buyout firms argued that its U.S. business had reached a saturation point, leading to a lower valuation.

Despite facing tough competition in the past, Subway’s recent efforts to revamp its menu and increase marketing spending have shown promising results. In the first half of 2023, the company reported a notable 9.3% increase in same-store sales in North America.

The acquisition deal between Roark Capital and Subway is expected to be closed within the next 12 months. However, it is notable that the deal includes a 4% breakup fee, which safeguards against any potential obstacles from antitrust regulators.

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