Subway/Roark: PE firm adds sandwiches to the menu

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Roark Capital found its hero in a foot-long sandwich. After a months-long auction process, the private equity firm has reached a deal to buy privately held US chain Subway. Financial terms were not disclosed, but it is understood that the purchase price values ​​Subway at approximately $9.6 billion (including debt). That would make it the third-largest deal in the restaurant industry. That’s a lot of dough.

Locke is no stranger to the food trade. It controls Inspire Brands, which bought Dunkin’ Brands Group for $11.3 billion, including 2020 debt. But rising interest rates combined with inflation-wary consumers means there is less room for error.

Subway is one of the world’s largest fast-food chains, with 37,000 locations worldwide. These stores have seen better days. Global sales peaked at $18 billion in 2012, according to market research firm Technomic. Since then, the chain has been competing with upstart competitors like Panera Bread, Potbelly and Chipotle Mexican Grill. Younger diners are shrugging off processed sandwich fillings in favor of more natural ingredients. Subway had global sales of more than $9 billion last year.

Roark paid $9.6 billion for Subway, about 12 times EBITDA. Rival chains, including McDonald’s and KFC owner Yum! Brands, trade at higher multiples.

But debt is costly today. Roark has $5 billion in debt financing in place to fund the deal. This translates to 6.25 times EBITDA. If EBITDA falls and interest rates rise as it refinances, Subway’s financial position will be stretched.

Roque mitigated this risk to some extent by including a “profit” clause. It will pay $9 billion upfront, with the remainder paid out over time if certain EBITDA targets are met. Private equity firms may also seek lower funding costs by securitizing entire businesses after a deal closes. This would involve bundling together royalties paid by restaurant franchises and using them as collateral for borrowing.

Roark will learn what American diners already know: Dining out has become expensive.