28 August 2023
Subway's $9.6 Billion Sale What Lies Ahead for Its Expansion
Subway concluded its prolonged bidding process for the sale of the family-operated sandwich franchise on Thursday. The outcome was a $9.6 billion agreement with a private equity firm that holds ownership of Dunkin' Brands as well.
Roark Capital, the acquiring party, is affiliated with Inspire Brands, a restaurant conglomerate that supports various other quick-service restaurant chains. This transaction marks the end of a chapter in Subway's history, spanning over half a century, during which the sandwich chain was under the ownership of its original founding families
“The transaction is a major milestone in Subway’s multi-year transformation journey, combining Subway’s global presence and brand strength with Roark’s deep expertise in restaurant and franchise business models,” Subway said in a statement.
Referring to data from Creditntell, Isner pointed out that Subway witnessed a decline in its number of U.S. stores, decreasing from over 24,000 by the close of 2020 to roughly 20,748 by the conclusion of 2022. According to CNBC, as of April, there were 20,603 U.S. locations. Subway, self-proclaimed as one of the globe's largest fast-food chains, asserts its presence with nearly 37,000 eateries spanning across over 100 nations. It's important to note that Subway's restaurants are managed and owned by franchisees, encompassing locations both within and outside the United States.
According to a report from The Wall Street Journal, Subway has entered into 15 franchise agreements on an international scale since the year 2021. The company is poised for swift expansion across global markets. Notably, among the projected 9,000 international restaurant openings, approximately 4,000 of these establishments are anticipated to emerge in China within the next two decades, as outlined by the Journal.
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Roark Capital, headquartered in Atlanta and overseeing assets worth $37 billion, specializes in directing its investments towards consumer and business service enterprises. This encompasses a particular focus on businesses operating within the realm of restaurants and retail, specifically those following the franchise ownership and multi-location models. The firm boasts significant involvement in American restaurant chains, counting Arby's, Buffalo Wild Wings, Sonic Drive-In, and Jimmy John's among its substantial investments. Notably, Jimmy John's stands as a competitor to Subway and has demonstrated notable growth.
Further, Subway's CEO John Chidsey told The Wall Street Journal, Subway is set to maintain its distinct identity within Roark's array of investments. Chidsey, in a prepared statement, expressed optimism about Subway's promising trajectory under Roark's umbrella, citing the firm's extensive proficiency in both restaurant operations and franchise business models. Notably, even after the sale concludes, the existing Subway management team will remain intact. Chidsey himself anticipates remaining in his role as well. Noteworthy is the fact that Chidsey, who assumed the position in 2019, was the first CEO in the company's history to not be a member of Subway's original founding families—the DeLuca and Buck families.
Subway has affirmed that this transaction marks the conclusion of an extensive auction process for the nearly six-decade-old business. This development arrives merely a month after the company celebrated its 10th consecutive quarter of positive same-store sales. Despite this transition, Subway intends to stay committed to its strategic plan launched in 2021. This strategy revolves around driving sales growth, introducing menu innovations, modernizing restaurant establishments, enhancing the overall guest experience, and expanding its international presence.
Isner acknowledged that the Consumer Price Index (CPI) for food consumed outside the home remains notably high. In this context, Subway has effectively maintained competitive pricing and stands to potentially benefit from cost-conscious diners in an uncertain economic climate. Nonetheless, he observed that the surge in popularity experienced by the quick-service restaurant (QSR) sector post-COVID has been largely driven by drive-thru services. Due to a significant number of Subway locations being situated in urban areas, they have not been able to fully capitalize on this trend.
Competitive Bidding
Engaged in a competitive bidding process, the precise details of the agreement between Subway and Roark have not been publicly disclosed. However, individuals acquainted with the transaction informed The Wall Street Journal that Roark has committed to an initial payment of $9 billion, with additional funds contingent upon the achievement of predetermined financial goals. Notably, other private equity firms, including TDR Capital and Sycamore Partners, were reportedly expressing interest in acquiring Subway as well.
Subway has secured J.P. Morgan as its financial advisor, while Sullivan & Cromwell LLP is providing legal counsel. Although a specific closing date has not been revealed, the finalization of the transaction is contingent upon regulatory approvals and customary closing conditions.
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The sale of Subway occurs just a few months after the company established a secondary headquarters in Miami, occupying over 64,000 square feet of space. Situated at 1000 NW 57th Court and to be named "1000 Subway," the property is situated within the Waterford Business District, a collaboration between Nuveen Real Estate and Allianz Real Estate. This location is conveniently positioned in proximity to the Miami International Airport.
Historically headquartered in Connecticut since its inception as "Pete’s Super Submarines" in Bridgeport in 1965, Subway had its central base in Milford, located in New Haven County, at Subway for an extended duration. However, the company is preparing to relocate shortly to nearby Shelton, situated in Fairfield County. At its forthcoming location, specifically 1 Corporate Drive, Subway will lease approximately 90,000 square feet. This move will provide employees with a host of amenities, including diverse dining options, fitness facilities, recreational offerings such as tennis and basketball, medical services, covered parking, and childcare centers.
