The deal marks the conclusion of a drawn-out auction that started in February and attracted interest from several private equity firms. Reuters reported on Tuesday on a so-called earn-out agreement that was key to Roark clinching a deal for Subway.

For the full deal price to be paid, Subway’s cash flow would need to reach certain milestones over a period spanning two or more years after the deal closes, according to the sources. Without the earn-out, the deal is worth $8.95 billion, the sources said (all figures US$).

Earn-out structures, while uncommon in the consumer and retail sector, are increasing in frequency in a challenging market for mergers and acquisitions as a way to reconcile price differences.

The sources said the arrangement helped bridge a gap in the valuation expectations between Roark and the DeLuca and Buck families that own Subway, which started up nearly 60 years ago in Connecticut.

The families were hoping to fetch more than $10 billion for Subway based on its strong brand and international growth, but the private equity firms countered it was worth less because they deemed its U.S. business saturated.

Roark prevailed over a rival bidding group led by buyout firms TDR Capital and Sycamore Partners, whose final offer was for $8.75 billion including an earn-out, and $8.25 billion without, the sources said.

Roark, which owns other restaurant operators and franchises — including rival U.S. sandwich chain Jimmy John’s — will pay Subway’s owners a break-up fee equivalent to four per cent of the deal’s value should antitrust regulators thwart the deal, one of the sources said.

The deal contact allows for 12 months for the transaction to be completed, according to the sources.

Roark took the view that the restaurant market is too fragmented for the deal to raise competition concerns, the sources added.

Jimmy John’s has more than 2,600 restaurants in 43 U.S. states. Subway has more than 37,000 restaurants in over 100 countries, including 21,350 in the U.S. and 3,135 in Canada.

Roark and Subway, which announced the deal on Thursday, declined to comment on the terms.

Roark currently controls Inspire Brands, the owner of restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.

Its experience of helping restaurant brands grow will be helpful, “especially in the U.S. market where it remains well below the peak it hit a few years ago,” said Neil Saunders, managing director of market research firm GlobalData.

Revamping operations

Tax considerations were part of the calculus to sell Subway. This is because the estate of co-founder Peter Buck, who passed away in 2021, donated his 50 per cent stake in the privately-held company to his philanthropic foundation under the terms of his will. This offers a shield from taxes on the sale of the stake.

Founded in 1965 by 17-year-old Fred DeLuca and his family friend Buck, Subway has been owned by the founding families since its first restaurant opened as “Pete’s Super Submarines” in Bridgeport, Connecticut.

The Milford, Connecticut-based company has been revamping its operations to deal with outdated decor and $5 deals on foot-long sandwiches that eroded franchisees’ profits. In 2021, the chain launched a menu overhaul and splashy marketing campaign as it embarked on a turnaround plan that has helped sales grow.

Subway, which has closed thousands of U.S. locations since 2016, said a year ago that it wants to shift away from its current base of small franchisees that own just one or two shops, which tend to be family-run and sometimes barely scrape by.

The company saw a 9.85 per cent increase in same-store sales in the first half of 2023. Its 12-month earnings before interest, taxes, depreciation and amortization are around $800 million, according to the sources.

— Reporting for Reuters by Anirban Sen and Abigail Summerville in New York and Deborah Sophia in Bangalore.

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A deal could be finalized this week, the report said, citing people familiar with the matter.

“Subway does not intend to make any further public comment regarding the process until the transaction has been completed,” the company told Reuters in an emailed statement.

Reuters reported earlier this month that private equity firms TDR Capital and Sycamore Partners were in talks to team up in their pursuit to acquire Subway, which in February said it was exploring a possible sale of its business.

Sources told Reuters then that Subway was targeting well over US$9 billion in a deal, and remains uncertain whether TDR and Sycamore can meet its price expectations. Another group led by Roark Capital was in the running, the sources had added.

Private equity firm Roark primarily invests in the franchised consumer and business services sectors. It has invested in Inspire Brands, which is the owner of Arby’s, Baskin-Robbins, Buffalo Wild Wings and Dunkin’ among others.

Subway, which has about 37,000 restaurants running in over 100 countries, including over 3,100 in Canada, was founded in 1965 by 17-year-old Fred DeLuca and family friend Peter Buck.

The company has been owned by the founding families since its first outlet opened as “Pete’s Super Submarines” in Bridgeport, Connecticut, and has operated under the name Doctor’s Associates Inc. since 1966.

For the first half of 2023, Subway saw a 9.3 per cent increase in same-store sales in North America, as its moves to revamp its menus, remodel its restaurants and improve marketing efforts helped draw more customers even in the face of stiff competition.

Roark Capital did not immediately respond to a Reuters request for comment.

— Reporting for Reuters by Ananya Mariam Rajesh and Deborah Sophia in Bangalore.

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McDonald’s Canada announced Wednesday it will expand the test marketing of its “P.L.T.” burger from its 28 stores in London, Ont. to also include 52 in Kitchener-Waterloo, Guelph and surrounding areas in southwestern Ontario, starting Tuesday (Jan. 14).

London was McDonald’s first-ever test market in the world for the burger, which features patties developed by Los Angeles-based faux-meat processor Beyond Meat.

“The initial test of the P.L.T. allowed us to learn more about guest demand and how to integrate this new menu item into restaurant kitchen operations, while delivering the P.L.T. to our guests with the level of quality and craveability they know and love from McDonald’s,” company chef Jeff Anderson said in a release.

“As a test-and-learn company, the McDonald’s expansion of the P.L.T. into more restaurants in the southwestern Ontario region will help us learn more about our guests’ tastes while continuing to provide variety within our menu.”

Subway, meanwhile, announced Monday (Jan. 6) it has expanded sales of its Beyond Meatball and Beyond Meatball Marinara submarine sandwiches to “participating” restaurants across Canada, including a “limited time” rollout in Quebec.

Subway in August announced a “culinary innovation partnership” with Beyond Meat, beginning with test marketings in September for the Beyond Meatball Marinara sandwich at 685 Canadian and U.S. outlets for a “limited time.”

Those test markets represented a small fraction of the Subway chain’s worldwide reach, which includes over 3,100 outlets in Canada and over 23,600 in the U.S., among sites in over 100 countries.

“Canada is a progressive market and we’ve seen strong engagement from consumers there,” Beyond Meat CEO Ethan Brown said Jan. 6 in Subway’s release. “Through our partnership with Subway, we look forward to offering delicious options that will excite new and existing fans.”

Neither the press release nor the chain’s U.S. website mention any further Beyond Meatball rollout in the U.S. market.

The product’s larger launch in Canada includes a run of surreal television commercials featuring U.S. lifestyle maven Martha Stewart, in which she shares plant care tips for growing one’s own Beyond Meatball tree.

“We all know meatballs don’t really grow on trees, however, delicious plant-based Beyond Meatballs are a reality that you can try now,” the company said in its release.

Beyond Meat products’ ingredients in reality include pea, mung bean and rice protein as well as coconut oil and cocoa butter for “marbling” and beets for a red beef-like colour in their uncooked form.

“Martha is the perfect partner to announce the nationwide launch of the Beyond Meatball Marinara sub in Canada,” Cristina Wells, senior marketing director for Subway Canada, said in the company’s release.

“Martha’s green thumb and culinary prowess made her a natural fit to speak to the unbelievable cultivation and care that goes into creating the Beyond Meatball.” — Glacier FarmMedia Network

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Subway on Wednesday announced a “culinary innovation partnership” with Los Angeles-based processor Beyond Meat, beginning with a “Beyond Meatball Marinara” submarine sandwich to be tested at 685 Canadian and U.S. outlets for a “limited time” starting in September.

The chain’s partnership with Beyond Meat “brings together dedicated culinary teams from both brands to explore new plant-based protein offerings,” the company said in a release.

Len Van Popering, Subway’s chief brand and innovation officer, described the Beyond Meatball as a “co-developed product that can’t be found anywhere else.”

The Connecticut-based chain didn’t say exactly where in the U.S. or Canada it will test the new product, but this rollout would go to just a small fraction of the chain’s 40,000-plus outlets worldwide, which include over 24,100 in the U.S. and over 3,100 in Canada.

While the sandwich chain has previously offered subs with vegan and vegetarian veggie patties from other sources in limited release at some of its stores, Beyond Meat’s CEO Ethan Brown, in the same release Wednesday, said the company “look(s) forward to a long-term partnership with Subway.”

A full rollout through Subway, if achieved, would be a significant expansion of reach for Beyond Meat, which today offers fresh and frozen plant-based proteins in patties, sausages and ground “meat” through over 53,000 retail and foodservice outlets worldwide.

In the Canadian market, Beyond Meat in April launched its Beyond Burgers at retail grocery chains nationwide including Loblaws, Sobeys, Save On Foods, Whole Foods and Co-op stores.

The U.S. company’s Beyond Burger patties, sausage and other fare have also made their way in recent months onto various Canadian dining and fast-food chains’ menus including those of Tim Hortons, A+W, Earl’s, White Spot, Panago Pizza, Quesada, Mucho Burrito, La Prep and Leopold’s Tavern, among others.

Ingredients in Beyond Meat’s products include pea, mung bean and rice protein as well as coconut oil and cocoa butter for “marbling” and beets for a red beef-like colour in their uncooked form.

Other major fast-food chains are also testing meat-substitute sandwiches in some markets, such as Burger King’s Impossible Whopper in the U.S., KFC’s Imposter Burger in the U.K. and McDonald’s soy-based burgers in Germany. — Glacier FarmMedia Network

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Subway, owned by Doctor’s Associates, is the world’s largest fast-food chain by number of restaurants. It had 26,744 locations operating in the U.S. at the end of 2016.

“We will continue to relocate some shops to better locations and look for new sites — both traditional and non-traditional,” the company said in an e-mailed statement.

Subway said its U.S. sales fell 1.7 per cent to $11.3 billion last year, while international sales climbed 3.7 per cent to $5.8 billion, reflecting a focus on overseas growth (all figures US$).

Subway rival McDonald’s has also reduced the number of its U.S. locations in recent years, as it seeks to cut costs by franchising out more restaurants.

Milford, Connecticut-based Subway is 100 per cent franchised.

Subway on Wednesday named former McDonald’s executive Karlin Linhardt senior vice president of marketing in the U.S. and Canada.

U.S. restaurants have faced lacklustre demand in recent months as more people choose to cook at home amid lower grocery prices.

Minimum wage increases have also hit restaurant chains, forcing them to hike menu prices in response.

— Reporting for Reuters by Karina Dsouza in Bangalore.

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The U.S.-based sandwich chain Subway said Tuesday it has now introduced “Canadian-raised” ham, turkey and shaved steak at its Canadian restaurants and is “committed” to sourcing all roast beef, chicken and meatballs from Canadian producers “by the end of the year.”

The Connecticut-based company recently committed to “free-from” sourcing, pledging to pull all artificial colours, flavours and preservatives from its product offerings by 2017.

So far, the company said, its Canadian arm has removed artificial colours, flavours and preservatives from 28 menu items, adding turkey, chicken and roast beef to the list as of Tuesday.

The company noted it has also moved to provide “home-grown produce across Canada, where possible,” starting in 2014 with Quebec-grown green peppers in its Quebec restaurants during peak harvest season.

This year, Subway said, its Ontario restaurants will provide Ontario-grown cucumbers, peppers, tomatoes and onions during peak harvest season.

British Columbia-grown cucumbers will also be served in restaurants in Western Canada when in season, the company added.

According to the chain’s website, its franchisees today operate 3,276 restaurants across Canada, behind only Tim Hortons among quick-service restaurants by number of stores. In sales, the privately-held chain is estimated to be in third spot behind Tim Hortons and McDonald’s.

Kathleen Bell, Subway’s director of marketing for Canada, said in a release Tuesday the “removal of artificial colours, flavours and preservatives and our move to source local ingredients where possible is the natural continuation of Subway Canada’s unwavering commitment to wellness.” — AGCanada.com Network

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Subway, which already serves eggs laid by free-range hens at its outlets in Europe and eggs laid by cage-free hens in Australia, said it has already begun using such eggs in select areas in the U.S. and Canada.

The restaurant chain, owned by Doctors Associates Inc., has more than 30,000 outlets in North America.

The decision comes at a time when the food industry is under pressure from groups including the Humane Society of the United States, Mercy for Animals and World Animal Protection, which have successfully lobbied many companies to adopt animal welfare practices.

Both General Mills and Kellogg said earlier this year they will source 100 per cent cage-free eggs by 2025.

Fast-food companies have made similar announcements. McDonald’s said in September that its 16,000 U.S. and Canadian restaurants would serve only eggs laid by cage-free chickens within 10 years, while rival Burger King has committed to using such eggs by 2017.

Starbucks said in October that it would also make the switch in North America within five years.

Subway’s recent policy changes in livestock sourcing also included a pledge to serve only proteins from antibiotic-free sources in the U.S. by 2025.

In its release Monday, the company said it “continues to monitor layer hen housing research to identify future, best-practice menu and ingredient solutions that meet the highest standards of animal welfare.”

— Reporting for Reuters by Ramkumar Iyer in Bangalore. Includes files from AGCanada.com Network staff.

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Subway, Starbucks, KFC and Domino’s Pizza were among the industry leaders graded “F” for their antibiotic policies in the report from consumer and health groups, titled “Chain Reaction,” released Tuesday.

The groups, which did not release results to companies prior to publication, based their grades on public statements, survey responses and correspondence with individual chains. As a result, companies given failing grades were not immediately able to comment.

An estimated 70 per cent of antibiotics important to human health are sold for use in meat and dairy production.

Concern is growing among public health experts that the overuse of such drugs, particularly those important to human medicine, are contributing to rising numbers of life-threatening human infections from antibiotic-resistant bacteria dubbed “superbugs.”

The U.S. Centers for Disease Control and Prevention (CDC) estimates that two million people are infected with drug-resistant bacteria each year and 23,000 die.

“From bacon cheeseburgers to chicken nuggets, most meat served by America’s chain restaurants comes from animals raised in industrial-scale facilities, where they are routinely fed antibiotics to prevent disease that is easily spread in crowded, unsanitary, stressful conditions,” said Kari Hamerschlag, a lead author of the report who is senior program manager at Friends of the Earth.

Subway was cited, in particular, for failing to publicly state a policy or plan to cut antibiotic use in the meats it buys, despite repeated requests by the report’s authors for clarification.

Chipotle Mexican Grill and Panera Bread finished with “A” grades, having won loyal followings for policies that include strict limits on antibiotic use.

Chick-fil-A, which is making meaningful progress toward its goal of only buying chicken raised without antibiotics by 2019, got a “B” in the report.

McDonald’s and Dunkin’ Donuts got “C” grades. McDonald’s plans to only source chicken raised without antibiotics important to human medicine by 2017. Dunkin’ Donuts aims to prohibit suppliers from using medically important antibiotics or antimicrobials in healthy animals, but it has not set a timeline.

Other groups contributing to the report included the Natural Resources Defense Council, Consumers Union, Food Animal Concerns Trust, Keep Antibiotics Working and the Center for Food Safety.

— Lisa Baertlein is a Reuters correspondent covering the U.S. restaurant and grocery sectors from Los Angeles.

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The world’s largest fast-food chain, with more than 36,000 restaurants around the globe, just finished one of its toughest years in decades.

It struggled to recover from a food scare in China that battered Asian sales and wrestled with economic weakness and political upheaval in Europe, its top revenue market. The company also lost market share to rivals in the U.S., where its image has been dented by frequent protests from workers seeking higher wages.

Sales at established restaurants, a closely watched gauge of performance also known as comparable sales, fell during the fourth quarter and for all of 2014. Revenue and net income suffered the same fates.

CEO Don Thompson, who took the helm in July 2012 and is under pressure to turn the business around, said he expected the trend to continue as McDonald’s works to make the business to be more nimble and responsive to customers.

“January comparable sales are expected to be negative and results are expected to remain pressured, particularly in the first half of the year,” Thompson said in a statement.

The company, trying to find the right recipe for diners’ growing appetite for healthier and fresher food, is trimming complicated menus, giving more control back to restaurant operators and testing customized burgers and sandwiches to compete with popular restaurants such as Chipotle Mexican Grill and Subway.

Fourth-quarter net income dropped 21 per cent to $1.1 billion, or $1.13 per share, while revenue fell more than seven per cent to $6.57 billion (all figures US$). Global sales at established restaurants were down 0.9 per cent.

U.S. comparable sales in December offered a glimmer of hope, rising 0.4 per cent and marking the first increase since October 2013.

McDonald’s set a 2015 capital spending target of around $2 billion, down from about $2.7 billion last year.

Company shares, which have underperformed rivals, the Dow and the S+P 500, dipped 0.4 per cent to $90.62.

— Reporting for Reuters by Lisa Baertlein in Los Angeles and Yashaswini Swamynathan in Bengaluru.

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