Subway sandwich chain to be acquired by Roark Capital for up to $9.55 billion

In a deal that, according to persons familiar with the situation, could value the American sandwich company at up to $9.55 billion, including debt, subject to targets in its financial performance, private equity firm Roark Capital agreed to purchase Subway on Thursday.

The agreement marks the end of a protracted auction that got underway in February and drew interest from a number of private equity groups. On Tuesday, Reuters published information about an alleged earn-out contract that Roark used to seal a deal for Subway.

According to the sources, Subway’s cash flow would need to meet specific benchmarks over a period of two or more years after the sale complete in order for the whole deal price to be paid. According to the sources, the deal would be worth $8.95 billion without the earn-out.

Even though earn-out structures are uncommon in the consumer and retail sector, they are becoming more common in a competitive M&A market as a means of bridging pricing discrepancies.

Based on its strong brand and foreign expansion, the families were hoping to sell Subway for more than $10 billion, but the private equity groups objected that it was worth less since they believed its U.S. market to be saturated.

According to the sources, Roark outbid a competing bidder group led by the buyout firms TDR Capital and Sycamore Partners, whose last offer was for $8.75 billion with an earn-out and $8.25 billion without.

According to one of the sources, Roark, which also owns rival sandwich chain Jimmy John’s and other restaurant operators and franchisees, will pay Subway’s owners a break-up fee equal to 4% of the deal’s worth in the event that antitrust regulators block the merger.