_{DEAL OF THE MONTH}

Subway Sells to Roark Capital for $9.6 Billion

Last week, foot-long producer Subway, announced its decision to sell to Roark Capital, an Atlanta-based private equity firm known for managing over $37 billion.

Their current portfolio already includes numerous household names like Buffalo Wild Wings, Jimmy Johns, Dunkin / Baskin Robbins, Arby's, Carl's Jr. / Hardees, Orange Theory, and many others.

As one of the largest - if not the largest - funds focused on franchise business models, it made sense for Roark to acquire arguably the most successful franchising concept in history, Subway.

Subway's journey began in 1965, and has grown to establish a global footprint with 37,000 outlets spread across 100+ countries. However, recent years have witnessed Subway grappling with competition from emerging rivals like Panera and Firehouse Subs in the US market, leading to a decline in their market share.

Subway, which is still controlled by the two founding families (the DeLuca and Buck families), announced that it was exploring a sale back in February and was expecting a steep valuation north of $10Bn.

Roark ultimately got Subway down to a much more reasonable ~$9.6Bn valuation. Roark negotiated the value down from $10Bn citing that they thought the US market was fairly saturated. Additionally, high interest rates have caused the costs of borrowing to increase significantly for funds looking to utilize typical LBOs, hurting returns and therefore reducing valuations across the market.

Roark's offer also includes an earn out mechanism, thereby limiting the cash received by Subway's owners at close and only being triggered if Subway's cash flows reach certain milestones over a set period of time following close. The earnout was included to help bridge a valuation gap between what Subway owners were looking for and what potential bidders were willing to pay.

The only other rumored competitor was a consortium of TDR Capital, Sycamore Partners and Goldman Sachs PE arm who offered less than Roark, but also included an earn-out structure.

The consortium flagged that the Roark transaction faces potential scrutiny from US regulators given Roark's ownership of Jimmy Johns, but the Subway owners and their advisors feel that is an unlikely outcome given how fragmented the restaurant market is as a whole.

Even though Roark was just selected as the winning party, as many of us know can relate to on the buyside, it's not over until the lawyers say it's over. That being said, it is unlikely that anyone else ends up with Subway at this point unless there is significant turmoil in the markets causing one party to attempt to re-trade.

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_VISUAL

Historical PE Deal Value vs. 10 Year US Treasury Rates

Despite rates being through the roof, PE isn’t dead yet and total deal value remains just off of the median since 2018.