Roark scores sandwich deal better than $5 footlong

SWEETGREEN

24/08/2023 15:43

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are her own.)
    By Anita Ramaswamy
       NEW YORK, Aug 24 (Reuters Breakingviews) - The private
equity firm behind Jimmy John’s just snagged another sandwich
chain. Roark Capital is forking over some $10 billion to buy
family-owned Subway in one of the largest restaurant deals in
history. With markets opening to initial public offerings – and
an earnout included in the deal that protects buyers - there’s
plenty to nibble on.
    Getting Subway to the point of a sale was no small feat for
Roark. The company was still owned by its founding family, and
like any deal, such insiders can often see value differently
than an unemotional buyer. The family had sought a higher
valuation when it mulled a sale this February. Roark’s bid
included a sweetener that helped it win out. The buyout shop led
by Neal Aronson will initially pay $9 billion but throw in
another $600 million or so over time if the company meets
certain cash flow thresholds, according to Reuters.
    Roark is a good buyer. It owns Dunkin’ Brands, a similar
fast food chain, and Subway could use some help of the
private-equity cost-cutting nature. The company, whose 37,000
locations make it the second-largest fast-food chain in the
world, struggled through the pandemic amid falling sales and
spats with franchisees. Ex-Burger King boss John Chidsey started
on a turnaround, tripling digital sales. But EBITDA margins are
still around 5%, figures from trade publication Franchise Times
suggest. That’s significantly below other franchised restaurants
including Domino’s Pizza  DOM.L , which is closer to 20%.
    The price tag leaves room for error. At $9.6 billion, Roark
is paying roughly 12 times Subway’s $800 million in EBITDA —
markedly lower than the 18.9 times the buyout shop dished out
for Dunkin’, according to PitchBook. And similarly
franchise-heavy peers Domino’s and Taco Bell-owner Yum Brands
 YUM.N  trade at 21 and 19 times last year’s EBITDA,
respectively.
    Conservatively assuming Roark funds half the deal with debt,
grows revenue by 5% annually and the company brings margins up
to 10% while using its excess cash flow to pay down leverage, it
could return more than 35% annually in just five years,
Breakingviews calculates. If Roark manages even better
performance, Subway could hit the public markets within a few
years, following IPOs of Cava  CAVA.N  and Sweetgreen  SG.N .
For Roark, which is now set to join the ranks of the world’s
biggest restaurant operators, that’s even better value than
Subway’s infamous $5 foot-long sandwich. 
    Follow @AnitaRamaswamy on X
    
    CONTEXT NEWS
    Sandwich franchise Subway has agreed to sell itself to
private equity firm Roark Capital. The deal is valued at $9.55
billion, including a $600 million earn-out, Reuters reported on
Aug. 24.
    Subway, which has roughly 37,000 restaurants in over 100
countries, did not disclose the terms of the deal in its
announcement. Reuters previously reported that the restaurant
chain began exploring a possible sale in February this year and
had hoped to fetch a valuation above $10 billion.

 (Editing by Lauren Silva Laughlin and Aditya Sriwatsav)
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