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 it will 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, 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 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, we calculate. If Roark manages even better performance, Subway could hit the public markets within a few years, following IPOs of Cava and Sweetgreen.

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.

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.

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