Roark Capital is potentially buying Subway. A report on Monday said that it could have a deal to buy the sandwich giant for $9.6 billion by the end of the week, though the process remains “fluid,” according to a source. But the report at least seems to suggest that Roark has the inside track in a sale that is close to completion.
For those of you who know such things, it might seem a bit weird that Roark would try to buy Subway. After all, doesn’t it already own a quick-service sandwich chain in Jimmy John’s?
Yes. But that doesn’t preclude Roark from buying Subway.
We’ve long thought Roark was a potential buyer of Subway, for a host of reasons: It has deep experience in restaurants and franchises and isn’t afraid of making the kind of long-term bet that it would take to make an investment in that chain pay off in the long run. Also it has been involved in a number of major deals of late, most notably the last Great Big Restaurant Deal in Dunkin’.
But there is also that Jimmy John’s question. The “freaky fast” sandwich chain is owned by Roark under the Inspire Brands umbrella.
Jimmy John’s, while focusing quite a bit on its delivery business, remains a substantial, primary competitor with Subway.
Yet how Roark operates Subway will be a key part of that discussion. As long as Subway and Jimmy John’s are not operated under the same umbrella, there’s no reason to think they can’t coexist under Roark ownership. That can work, restaurant consultant John Gordon said, so long as Subway remains under the Roark side and not under Inspire Brands, which owns Arby’s, Dunkin’, Buffalo Wild Wings and Sonic, in addition to Jimmy John’s.
“It would be horrendous for Roark to give Subway to Inspire,” Gordon said.
In theory, however, a Roark acquisition of Subway could speed a move with Inspire Brands, which has long been subject to rumors and speculation on a potential initial public offering. The IPO market is there for the taking for restaurants. Roark could use this as an opportunity to take one big company public while bringing another big company into the fold.
Either way, there are plenty of examples of private equity groups or even strategic operators that own companies that compete with one another. For instance, Darden Restaurants just bought Ruth’s Chris, which we thought was a competitor of Capital Grille. Brand collector Landry’s owns so many chains that compete directly for customers it isn’t even funny.
Beyond this, a Roark acquisition of Subway would be one of the better outcomes for Subway and its U.S. franchisees. While Roark hasn’t exactly been batting 1.000 on its restaurant investments (Hardee’s, Corner Bakery), it has made a few shrewd deals, such as Arby’s, Wingstop and Culver’s.
As we’ve said, Subway is a long-term fix. While the U.S. market is improving, operators here are still closing locations and any potential turnaround is in the early stages. Roark takes a long-term time horizon with its acquisitions, meaning it will have the patience necessary for a turnaround.
But we believe the real prize is international. Subway’s best hope is to get the domestic market on an even footing while reinvigorating its international market—much in the way Burger King did a decade ago. Subway’s unit count declined between 2017 and 2021 before the bleeding stopped last year. And the multiple development deals the chain has signed in the past two years could give the new owner plenty of growth to offset whatever challenges there are on the U.S. side.
To be sure, all of this depends on Subway’s management, whether it continues to be CEO John Chidsey in a post-acquisition environment or Roark brings in its own CEO. And all this could be moot if someone else steps forward and submits a bigger bid.
But, for now, it appears as if Roark is buying some footlongs.