Roark Capital in Lead to Acquire Subway for Over $9 Billion with Earn-Out Conditions

Private equity firm Roark Capital is reportedly ahead in the race to acquire sandwich chain Subway for more than $9 billion. The deal includes an earn-out provision, which defers payment on part of the consideration until Subway’s cash flow reaches certain milestones after the deal closes. The earn-out structure helped bridge the gap in valuation expectations between the DeLuca and Buck families, who own Subway, and the private equity firms bidding for the company. The DeLuca and Buck families hope to sell Subway for more than $10 billion based on its strong brand and international growth, but potential buyers argue that its U.S. business is saturated. Other firms, including a consortium of TDR Capital, Sycamore Partners, and Goldman Sachs, have also attached an earn-out to their offers. The consortium has been trying to convince Subway’s owners that a deal with Roark would raise antitrust concerns, but the families believe the restaurant market is too fragmented for such concerns. The deal could be reached as early as this week. Subway has been undergoing a menu overhaul and turnaround plan to address declining sales and outdated decor. The company has closed thousands of U.S. locations since 2016 and wants to shift away from small franchisees that own only one or two shops. Subway saw a 9.85% increase in same-store sales in the first half of 2023, and its 12-month earnings before interest, taxes, depreciation, and amortization are around $800 million. Roark Capital controls Inspire Brands, which owns various restaurant chains, including Jimmy John’s and Arby’s. Subway has over 37,000 restaurants in over 100 countries.