Roark Capital $9.5bn acquisition of Subway

Acquisition Summary

Subway IP LLC is an American multinational fast-food restaurant franchise that is present in over 102 countries and territories. It was the fastest-growing franchise in the world in 2015, and it is the largest single-brand restaurant chain and the largest restaurant operator in the world.

In 2017, Subway was suffering closures as a result of three consecutive years of falling profits and problems with franchise promotion costs.

Despite efforts to attempt to change the direction of profits, in 2023, Subway announced that they were in the process of selling the company to private ownership.

There was also speculation that the sale stemmed from a place of tax-shielding considerations, due to the fact that one of the co-founders, Peter Buck, had donated 50% of his stake in Subway to his philanthropic foundation in his will.

They enlisted JP Morgan as financial advisors to assist in the sale. The price of the company was to be listed as $10 billion. There were multiple potential buyers, including the asset management divisions of Goldman Sachs, TDR Capital and TPG Inc, and Roark Capital.

Roark Capital Management, LLC, is a Private Equity (PE) firm from Atlanta, United States, which holds around $37 billion assets under its management. The firm focuses on leveraged buyout investments.

Roark Capital finalized its acquisition of Subway for $9.6 billion in April 2024, following some delays caused by a review by the Federal Trade Commission (FTC). This acquisition was the third-largest in US restaurant history.

Subway’s CEO, John Chidsey, shared his enthusiasm for the acquisition, highlighting the company’s commitment to providing improved food options and an enhanced guest experience. Despite facing challenges in recent years, Subway remains dedicated to innovation and growth, boasting approximately 36,000 locations globally.

Deal Rationale

Roark Management has a large and powerful food portfolio, and Subway made a sensical addition alongside Arby’s, Baskin Robbins, and Auntie Anne’s. Their expertise in the food market will allow them to make the most of the acquisition.

Roark’s rationale is clear - their acquisition of Subway gains them access to over 37,000 outlets and a huge portion of the food service industry globally, despite the concentration being in the US and Canada.

They have potential to expand into developing economies, however, as their focus shifts into rapid global expansion and restaurant modernisation in emerging nations such as Nigeria or Kenya.

This would allow Subway to diversify its revenue and gain a competitive edge by getting out in front of its competition in these regions and growing its base before other companies move into the areas. Their ability to use their cross-company expertise will certainly improve their success in this area.

What changes can we expect at Subway?

Culinary and Digital Innovation: Subway is looking to enhance its menu and invest in digital technology to improve the customer experience.
Restaurant Modernization: The company will work on modernizing existing locations to make them more appealing and efficient.
International Expansion: Subway aims to expand its global presence, building on its nearly 37,000 locations. The company will continue its ‘Build a Better Subway’ program, which focuses on providing franchises with better tools and resources.
Support for Franchises: Enhancing support for franchises through the ‘Build a Better Subway’ program, which provides improved tools and resources.

Despite these changes, Subway’s leadership team is expected to stay the same, ensuring continuity in strategic planning and operations.

These initiatives aim to drive growth and improve the overall guest experience at Subway.

How will this lead to Subway being a better company in the long-run?

There is significant promise for the revitalisation of Subway’s brand. They have experienced positive same store sales. Because of the saturated food market, it is important that Roark are able to leverage their extensive experience in the food sector, which might enable Subway to turn their business around and have a positive outlook again.

Potential risks of Roark’s acquisition

The acquisition detailed the fact that there is a dependence on an earn-out structure. This means that there is a contractual agreement that links a portion of the purchase price to the performance of the business after the sale, making it contingent on financial performance.

It is crucial to watch the way in which Roark manages Subway in relation to its other brands in its portfolio. This is mainly to ensure customer loyalty and maintenance of Subway as its own brand.

To fail to do so would indicate a requirement of a degree of caution for investors as their treatment of Subway post-acquisition is crucial to its success. Therefore, despite the fact that Roark’s portfolio of restaurant brands poses an advantage to investors, it might also bear thinking about that there is an element of caution to be found as their overexposure to the restaurant sector may backfire.

How will this affect franchise owners?

Roark Capital’s acquisition of Subway is set to bring several positive changes for franchise owners:

Enhanced Support: Roark intends to continue the ‘Build a Better Subway’ program, equipping franchises with improved tools and resources to enhance their operations.
Modernization Efforts: Investments aimed at modernizing restaurant locations will create a more attractive and efficient environment for both customers and staff.
Menu and Digital Innovations: The introduction of new menu items and digital upgrades will draw in more customers and streamline operations, potentially boosting sales.
Global Expansion: As Subway grows its international footprint, franchise owners could see benefits from increased brand recognition and customer traffic.

However, there are also some potential negatives:

Franchisees and owners may encounter initial expenses associated with upgrading their facilities and integrating new technologies.

Operational Changes: Adjusting to new menu offerings and digital systems might necessitate extra training and modifications in everyday operations.
Heightened Competition: Since Roark Capital owns multiple fast-food brands, there could be intensified competition within its portfolio, which may affect market share.

To offset these potential risks, there are preparation steps that are suggested to help franchises succeed:

Stay Informed: Regularly check for updates and training sessions from Subway’s corporate team to stay aware of new initiatives and requirements.
Embrace Digital Tools: Dedicate time to learn and adopt new digital tools and technologies that Subway will roll out, including improved mobile apps and digital menu boards.
Upgrade Facilities: Consider planning for renovations or upgrades to keep pace with modernization efforts that enhance the customer experience.
Engage with Support Programs: Utilise the ‘Build a Better Subway’ program and other support initiatives to streamline operations and boost profitability.

Conclusion

Roark Capital’s acquisition of Subway is poised to introduce major changes, such as menu updates, modernization of restaurants, enhancements in digital services, and expansion into global markets.

These efforts are designed to enhance the customer experience and provide support to franchises, helping Subway to continue its growth and success. However, the success of the acquisition hinges on Roark’s ability to utilize its expertise to be able to unlock Subway’s potential.

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