The market for mergers and acquisitions in the restaurant space has been tepid, at best, for the past couple of years thanks to a combination of higher interest rates and weak profitability performance thanks to a dose of generationally high inflation.
The exception to this has been the franchise space, as proven again by the $8 billion deal for Jersey Mike’s by the private-equity firm Blackstone.
A company that sells the right to operate a brand is always valuable, because the royalty stream is far more profitable than is the sale of food to consumers. And in many respects a franchise is a franchise, whether its brand sells hotel rooms or oil changes or fast food. Despite a host of issues, Subway was able to fetch one of the largest sums ever paid for a restaurant chain last year, for instance.
Blackstone, the world’s largest alternative asset manager, has long loved the franchising space. And it has made an absolute bundle on many of them.
For instance, in 2007 it acquired Hilton Hotels for $26 billion. It funded 78% of that deal with debt, so Blackstone used just $5.6 billion of its own money for the purchase. By the time it completed its exit in 2018, it had made profits of nearly $14 billion.
Now, Blackstone is turning its attention to the restaurant business, and it has been the biggest buyer of restaurant chains—by far—in 2024.
Earlier this year, it invested in the drive-thru coffee chain 7 Brew. And then it made the year’s biggest and until now best deal with a $2 billion acquisition of the underrated Tropical Smoothie Café.
Now it has Jersey Mike’s, one of the industry’s best and most respected names.
At a time when most of the traditional restaurant buyers are zigging, either because they’ve been burned by bad investments or because they’re still soaking up massive deals made before, Blackstone is zagging.
Blackstone was patient, working with Jersey Mike’s for a long time to get the deal done. And it keeps the company’s CEO and owner, Peter Cancro, who has grown the chain into the second-largest sandwich brand in the country by doing things his way. Cancro will keep a big chunk of ownership in the chain he created. But he also gets to cash out when its value is arguably at its zenith.
The deal also begs another question: What would you prefer, spending $8 billion on the high-growth Jersey Mike’s or $9.6 billion on the giant Subway, with its declining U.S. franchise business and yet plenty of work to do on the international side?
For $10 billion, Blackstone is getting two chains that have averaged more than 20% U.S. system sales growth over the past five years. The firm’s task in those deals is to simply ensure they can keep doing what they’ve been doing over the past few years and it will likely generate a profit.
Oh, and we probably shouldn’t forget the high-potential deal in 7 Brew, one of the country’s fastest-growing chains in a sector that is booming right now.
On the other hand, Roark paid slightly less for an established chain in Subway with a troublesome recent track record both in the U.S. and internationally. It will need to spend time and energy into steering that chain onto the right track.
The task for that $9.6 billion is just far more difficult than the task Blackstone has with its $10+ billion.