We never thought the Subway sale would be easy but this is ridiculous.
The sandwich giant’s sale to Roark Capital is, reportedly, under investigation by the U.S. Federal Trade Commission. The agency is apparently concerned that Roark Capital, its buyer, will own too much of the restaurant business. Or perhaps too much of the business of selling elongated sandwiches to the lunch-consuming public.
In any event, it adds another odd chapter in a long, public and frequently delayed sale process of the country’s biggest restaurant chain by unit count.
The company was put on the block, officially, in January, announced through anonymous reporting from the Wall Street Journal. The company itself sent out a press release a month later. And the sale would take another seven months to be announced, with almost monthly comments from various official sources that the deal was near complete.
The announced price, meanwhile, fluctuated between $7 billion and $10 billion. In the end, Roark apparently agreed to pay $9.6 billion, with a chunk of that in the form of an earn-out, meaning the company has to meet certain financial metrics for its shareholders to get their full price.
The lengthy process was due to a combination of factors, mostly due to Subway’s immense size and recent history of decline and the fact that buyers and lenders are far more scrutinizing of such deals right now. Just ask Pollo Tropical.
One issue in the background of the Roark-Subway deal was the private equity firm’s ownership of Jimmy John’s, through Inspire Brands. Some buyers apparently pushed the idea on Subway’s owners that a Roark deal would lead to regulatory scrutiny. Subway went ahead and made the deal, apparently betting that it would not be a problem.
Just because the FTC is taking a harder look at the deal does not mean that the agency will block the deal or do anything beyond, “assure us you won’t be a bad franchisor.” But that still means that the deal’s finalization is being delayed, again, and delay is generally a bad thing.
As we said over the summer, Roark will own an awful lot of the U.S. restaurant business with this sale, more as a percentage of total industry sales than McDonald’s. And it will dominate the sandwich market.
But that domination is not unusual in an industry where a single player tends to hold a massive share of various segments, such as Taco Bell’s share of the Mexican market or Chick-fil-A’s share of the chicken market. And Subway had just as much a share of that sandwich market a few years ago before franchisees closed restaurants in droves.
Still, the FTC’s move is a signal of just how different the regulatory environment is for restaurants these days. Restaurant companies were typically not big enough to warrant such scrutiny. But now, large-scale strategic deals—even if they’re not technically strategic deals—can be expected to catch the eye of federal regulators.
And given just how much the federal government is eyeing the restaurant industry right now, be it through joint employer rules or franchise regulations, maybe the FTC’s action really should have been expected.