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Hungry for more: Subway sandwich chain serves up fresh M&A record

Subway’s sale by its two founding families to Roark Capital Group last month for USD 9.55bn has boosted restaurant dealmaking to the highest levels in almost a decade.

The home of the footlong sandwich helped push deal volume in North America’s restaurant industry to USD 15.5bn for the year to date (12 September), the largest serving at this point in the year since 2014’s USD 20bn.   

Subway’s takeout is the fourth largest North American deal since Mergermarket records began in 1995. It comes behind only Canada-based Tim Hortons’ USD 13.3bn acquisition by Burger King in 2014, the USD 11.7bn purchase of Dunkin’ Brands by Inspire Brands in 2020, and Caesar’s USD 10.98bn sale to Harrah’s Entertainment in 2004, although all those bigger deals included debt, while Subway was debt free.

The US’s largest dining chain by number of outlets, Subway’s sale is also private equity’s biggest ever leveraged buyout in the continent’s restaurant industry. The next biggest is 3G Capital’s nearly USD 4bn buyout of Burger King in 2010.

Hold the check

Restaurant M&A activity tends to rise in the years following a recession. The number of transactions shot up after the Global Financial Crisis’s 2009 nadir, and again after early Covid-19 lockdowns trashed economies in 2020. One reason for the increase in the number of deals in 2021 is that private equity firms became anxious to exit their portfolio companies after the pandemic had extended their holding periods by one or two years. “People were like, 'this is going to take forever, let’s just sell it and move on,'” said Andy Wiederhorn, chairman and founder at Fat Brands [NASDAQ:FAT], which owns several dining brands, including Fatburger and Round Table Pizza.

But rising interest rates over the last 18 months, combined with economic uncertainty and persistently high price expectations from sellers then led to a slowdown in the number of deals, added Wiederhorn.

Interest rates need to stop rising and inflation needs to dip below 3% -- in July it hovered near 5% -- before one private equity partner said he would consider exiting any restaurant chains. “I’m not selling any of my companies this year,” he said. “Next year should be a better seller or IPO market. But if not, I’ll just push it out even more.”

Given the 20% discount in valuations, sellers don’t want to sell unless they must, preferring to raise capital and improve margins while they wait, said the PE partner. Buyers too are mostly waiting on the sidelines for clarity from the Federal Reserve.

Only major or popular brands – like Subway, Ruth’s Chris Steak House, and Fogo de Chão – have been attracting buyers willing to pay in this environment. Ruth’s Chris sold to Darden Restaurants [NYSE:DRI] in June and Fogo de Chão sold to Bain Capital last month having previously filed to go public.

More takeouts coming

Many chains – such as Chipotle Mexican Grill [NYSE:CMG] and Shake Shack [NYSE:SHAK] – have shown their resilience by adapting to the new conditions and posting higher margins, said a PE-backed restaurant executive.

Consequently, more M&A and PE transactions are expected to happen later this year, said the executive. “The industry counterparts I’m talking to [are] targeting Q4 as the IPO window opens more,” he said.

Those looking to go public in the coming months hope to emulate Cava Group’s [NYSE:CAVA] strong debut in June. But they could follow Fogo de Chão’s path and sell instead.

Among such candidates are multi-brand platforms that roll up franchises, such as Sun Holdings or Sizzling Platter, surmised the executive. Cici’s Pizza, having grown under Gala Capital’s stewardship, also could go public – or sell. Panera Bread has signaled its desire to list again. Fat Brands aims to spin off its Twin Peaks sports bar chain in early 2024, but could sell it to private equity instead.

Other possible LBO targets include Dine Brands Global [NYSE:DIN], according to the PE partner.   


Meanwhile, the question on everyone’s lips is whether other sandwich chains that compete with Subway could draw interest too. That would put Jersey Mike’s and Jimmy John’s on a buyer’s menu.

Analytics by Izaz Ansari