Subway’s deal to sell itself for a whopping $9.6 billion could face more antitrust scrutiny than expected, sources said — and a serious sticking point could be strict competitive rules the chain has placed by itself franchisees, The Post has learned.
The struggling sandwich giant agreed last month to sell itself to Roark Capital, an Atlanta-based buyout firm headed by financier Neal Aronson that already owns a slew of other fast-food chains including Dunkin Brands, Arby’s, Sonic Drive-In, Schlotzky’s and Jimmy John’s.
Combining all of those chains with Subway — a deal that’s expected to be vetted by the Federal Trade Commission — would create a sandwich-slinging colossus commanding greater than 40,000 restaurants — 3 times the variety of US locations as McDonald’s.
Insiders imagine Subway and Roark are more likely to argue that the resulting conglomerate wouldn’t pose competitive concerns because it will still be far smaller than the US fast-food industry as an entire.
“The beauty of franchising is franchisees set their very own pricing and consumers visit all types of quick service restaurant brands,” Subway CEO John Chidsey told CNBC in an interview this month, when asked about Roark owning Jimmy John’s and Schlotzky’s.
“They don’t just give attention to one brand,” Chidsey added. “I don’t expect any issues there.”
Nevertheless, Subway’s franchise agreement outlines intimately the way it defines its competition — and a number of the biggest chains which are owned by Roark appear to suit the bill, in keeping with a 2021 copy of the agreement obtained by The Post.
In a key passage, the franchisee agreement defines a fast service restaurant that might be “competitive” for Subway as being inside three miles of one among its restaurants and deriving “greater than 20% of its total gross revenue from the sale of any variety of sandwiches on any variety of bread, including but not limited to sub rolls and other bread rolls, sliced bread, pita bread, flat bread, and wraps.”
Although restricted menu items don’t include “hamburgers, hot dogs, burritos, or fried chicken sandwiches,” in keeping with the document, that might still leave room for Arby’s roast beef sandwiches, experts said. Meanwhile, the agreement explicitly mentions by name Jimmy John’s, McAlister’s Deli and Schlotzky’s because it ticks off competitors.
“The perception of the merging parties themselves receive a whole lot of emphasis,” former Republican FTC Chairman William Kovacic told The Post, saying the restrictions within the franchise agreement could raise serious concerns with regulators. “That could be a start line to think in regards to the dimensions of the market.”
Spokespeople for Subway and Roark declined to comment.
Some imagine there also could be a risk with Roark’s Dunkin chain, which like Arby’s isn’t mentioned within the document. While Dunkin’ doesn’t publicly break down its sales by category, in 2017 it generated 27% of sales from items aside from doughnuts and beverages — largely its breakfast sandwiches, in keeping with publication Franchise Chatter.
Elsewhere, Roark’s Sonic Drive-In chain, even though it’s known for its burgers, also sells chicken and grilled cheese sandwiches and has an assortment of breakfast sandwiches. A Subway franchisee told The Post it asked to open a Sonic several years ago and was denied — on the grounds that Sonic was considered a competing business.
“You kept me imprisoned and then you definately are doing the precise thing you told us to not do to earn cash,” the Subway franchisee told The Post upon hearing news of the corporate’s merger with Roark. “I hate Subway’s hypocrisy.”
One other former Democratic FTC commissioner, who asked to not be named, added that Roark agreed to pay a $360 million breakup fee to Subway if it could not complete the buyout in 12 months. That’s an indication that Subway sees substantial risks for the deal, the ex-FTC commissioner said.
“These two corporations are going to say they usually are not competitive, but the vendor’s own franchise agreement says otherwise,” the previous FTC commissioner said. “Merger guidelines emphasize direct evidence over defining markets. Here is direct evidence that a lot of Roark’s brands compete with Subway.”
The subsequent highest bid for Subway was from TDR Capital and Sycamore Partners — a pair of private-equity firms which don’t own competing chains — was a much lower $8.25 billion plus an extra $500 million if Subway hit certain performance targets, in keeping with Reuters.