Subway’s deal to sell itself for a whopping $9.6 billion could face more antitrust scrutiny than expected, sources said — and a major sticking point could be strict competitive rules the chain has placed on its own 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 more than 40,000 restaurants — three times the number of US locations as McDonald’s.
Insiders believe Subway and Roark are likely to argue that the resulting conglomerate wouldn’t pose competitive concerns because it would still be far smaller than the US fast-food industry as a whole.
“The great thing about franchising is franchisees set their own pricing and consumers visit all kinds 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 focus on one brand,” Chidsey added. “I don’t expect any issues there.”
However, Subway’s franchise agreement outlines in detail how it defines its competition — and some of the biggest chains that are owned by Roark appear to fit the bill, according to a 2021 copy of the agreement obtained by The Post.
In a key passage, the franchisee agreement defines a quick service restaurant that would be “competitive” for Subway as being within three miles of one of its restaurants and deriving “more than 20% of its total gross revenue from the sale of any type of sandwiches on any type 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,” according to the document, that would 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 as it ticks off competitors.
“The perception of the merging parties themselves receive a lot of emphasis,” former Republican FTC Chairman William Kovacic told The Post, saying the restrictions in the franchise agreement could raise serious concerns with regulators. “That is a starting point to think about the dimensions of the market.”
Spokespeople for Subway and Roark declined to comment.
Some believe there also could be a risk with Roark’s Dunkin chain, which like Arby’s isn’t mentioned in the document. While Dunkin’ doesn’t publicly break down its sales by category, in 2017 it generated 27% of sales from items other than doughnuts and beverages — largely its breakfast sandwiches, according to publication Franchise Chatter.
Elsewhere, Roark’s Sonic Drive-In chain, although 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 are doing the exact thing you told us not to do to make money,” the Subway franchisee told The Post upon hearing news of the company’s merger with Roark. “I hate Subway’s hypocrisy.”
Another former Democratic FTC commissioner, who asked not to 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 a sign that Subway sees substantial risks for the deal, the ex-FTC commissioner said.
“These two companies are going to say they are not competitive, but the seller’s own franchise agreement says otherwise,” the former FTC commissioner said. “Merger guidelines emphasize direct evidence over defining markets. Here is direct evidence that many of Roark’s brands compete with Subway.”
The next highest bid for Subway was from TDR Capital and Sycamore Partners — a pair of private-equity firms which do not own competing chains — was a much lower $8.25 billion plus an additional $500 million if Subway hit certain performance targets, according to Reuters.
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