NEW YORK - Private equity firm Roark Capital is in the lead to acquire sandwich chain Subway for well over $9 billion after attaching conditions to some of the windfall the two families that own it will get, people familiar with the matter said on Tuesday.

These conditions, known as an earn-out, defer payment on part of the deal consideration, the sources said. For the full price to be paid, Subway's cash flow would need to reach certain milestones over a specified period after the deal closes, the sources added.

The previously unreported arrangement helped bridge a gap in the valuation expectations between the DeLuca and Buck families that own Subway and the buyout firms vying for it, according to the sources.

The families put Subway up for sale hoping to fetch more than $10 billion 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.

A challenging financing market for leveraged buyouts amid high interest rates also weighed on the sale process.

A consortium of TDR Capital, Sycamore Partners and Goldman Sachs Group Inc's private equity arm, which has offered less than Roark for Subway, also attached an earn-out to its offer, the sources said. Further details of the proposed earn-out structures could not be learned.

The consortium has been seeking to convince Subway's owners that a deal with Roark would face U.S. antitrust risk given the latter's ownership of other restaurant brands, including sandwich chain Jimmy John's, the sources said.

So far, the families have taken the view that the restaurant market is too fragmented for a deal with Roark to raise competition concerns, the sources added. A deal could be reached as early as this week, according to the sources.

The sources requested anonymity because the matter is confidential. The Wall Street Journal reported on Monday that Roark Capital was nearing a deal to buy Subway for about $9.6 billion.

A spokesperson for Subway declined to comment, while representatives for Roark and TDR did not immediately respond to requests for comment. Sycamore and Goldman Sachs declined to comment.

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.

Lingerie maker Victoria's Secret & Co negotiated the acquisition of online startup Adore Me last year using an earn-out structure. It agreed to pay $400 million up front, with subsequent payments totaling between $80 million and $300 million subject to Adore Me's financial performance two years after the completion of the deal.



Founded in 1965 by 17-year-old Fred DeLuca and family friend Peter 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% 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.

Roark controls Inspire Brands, owner of the Jimmy John's, Arby’s, Baskin-Robbins, Buffalo Wild Wings, Dunkin’, Rusty Taco and SONIC Drive-In chains.

Champaign, Illinois-based Jimmy John’s has more than 2,600 restaurants in 43 states. Subway has more than 37,000 restaurants in over 100 countries.

(Reporting by Abigail Summerville and Anirban Sen in New York; Editing by Greg Roumeliotis and Muralikumar Anantharaman)