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Private equity has successfully picked out most of the top franchise brands that are large enough to attract professional investors. Jersey Mike’s and Subway are two high-profile holdouts. Last year, Subway announced it had been acquired by Roark Capital for an expected $9.5 billion, but the deal is still ongoing and under review by the Federal Trade Commission. Now rumors are circulating that Jersey Mike’s is also considering a sale to PE firm Blackstone for potentially $8 billion.
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Could Jersey sell Mike’s?
Jersey Mike’s is a growth story with strong unit economics. There is still a lot of untapped growth in the US market and the international plan has yet to be implemented. Its owner, Peter Cancro, remains deeply involved in the business and has built an admirable customer loyalty and entrepreneurial culture. While Subway is being sold from shareholders’ assets, Cancro is making the very personal decision of whether to bring in a partner. We can probably credit the sale of Jimmy John’s to Roark in 2019 for getting Cancro to get a handle on P/E valuations. Jersey Mike’s is the second largest sub-style sandwich brand. According to Technomic, sales have tripled since 2019 and will reach $3.3 billion in 2023. Cancro continues to have ambitious growth goals for Jersey Mike’s. Will a large PE firm like Blackstone be able to participate in this next wave of growth?
Cancro’s ambivalence towards a PE transaction is clear in his press interviews. He avoided PE for years. The culture he has built is very important to him personally. And Jersey Mike’s doesn’t need PE investment to grow. Thanks to the high cash flow, $980 million has already been allocated to securitize the entire company. According to Jersey Mike’s 2024 Franchise Disclosure Document, in the last three years alone, distributions totaled $215 million (in 2023), $173 million (in 2022), and $143 million (in 2023). 2021) paid. The cash flow could instead be used to finance acquisitions.
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Jersey Mike’s: The Culture Question
Is it worth it for Cancro to give up majority control now? An $8 billion valuation is certainly tempting. Today, many new franchises are being created to quickly transition the business to private equity. Jersey Mike’s is one of the remaining major independent brands founded in a time when culture reigned supreme. The fact that Cancro is apparently seriously considering a PE transaction is more of a turning point in franchising than Subway’s real estate sale to Roark. When PE takes majority control, the culture changes. Sometimes this change is good for franchisees, employees, suppliers and customers, but sometimes it is not. There isn’t much talk about culture during the Subway takeover. But the question of culture plays a big role in Cancro’s decision to take on a partner.
There have been rumors that Jersey Mike’s may be making brand acquisitions to provide franchisees with more expansion opportunities. Cancro has the entrepreneurial drive and proven ability to grow iconic brands. My gut feeling is that if Cancro brings in a PE partner now, the story and intent will be about more – like building a platform – and not just a big stock sale.
It’s encouraging to see a founder wrestle with this decision. Many smaller brands these days are rushing into the arms of private equity as soon as they can find a buyer. Jersey Mike’s presents an example of admirable entrepreneurial spirit in the face of undeniable change now that PE is so active in franchising.
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Subway and Roark
Subway is still a big fix-it project. It has a well-known global brand and plenty of room for growth, but especially in the US, franchisees are fed up with low profitability. Subway’s franchisee association recently hired a prominent attorney to press management on a number of issues of concern to franchisees. There’s no word yet on whether Roark is considering paying billions for this fix-it project – not yet.
If Roark comes through, it’s a bet on a turnaround. First, management will focus on bringing in top franchisees, driving remodels and improving operations, marketing and menus to drive same-store sales growth. Next, I expect them to open as many international offices as possible to offset the hundreds – if not thousands – of closures still pending in the US market. Roark, one of the most prolific users of entire company securitization (debt secured by royalties and rebates), will also immediately impose up to $5 billion in debt on the company, repaying investors in part through large distributions.
Subway management is once again aggressively pushing the issue of costly renovations with franchisees. The news lands with a predictable thud, especially given the enormous shareholder wealth expected to be created by the PE transaction. Corporate also has plenty of cash (estimated annual EBITDA of $725 million) to fund improvements while many franchisees operate on razor-thin margins.
While I expect the Subway/Roark transaction to close, I wouldn’t be surprised if Roark backs out, lowers the asking price, or demands a higher earnout to solidify the deal. Roark has more franchising experience than any other PE firm, particularly in the restaurant sector. But there is a fine line between bravery and overconfidence. Roark protects its reputation and avoids public disagreements with franchisees.
It will be difficult for Roark to quell public discontent from franchisees, and the continued closures will be a clear message. Because Roark rarely abandons its investments, this could create an unpleasantly visible quagmire, especially if Roark overleverages the company and new units don’t open quickly enough to offset the closures.