Subway’s recent $9.6 billion deal to sell itself to Roark Capital could face more antitrust scrutiny than initially expected. One major area of concern is the strict competitive rules that Subway has imposed on its franchisees. Roark Capital already owns several other fast-food chains, including Dunkin Brands, Arby’s, Sonic Drive-In, Schlotzky’s, and Jimmy John’s. If the deal goes through, this consolidation would create a massive fast-food conglomerate with over 40,000 restaurants in the US alone, three times the number of McDonald’s locations.
Insiders predict that Subway and Roark will argue that the resulting conglomerate would not pose any competitive concerns since it would still be smaller than the overall US fast-food industry. However, Subway’s franchise agreement outlines specific criteria for competition, and some of Roark’s chains appear to meet those criteria. The agreement states that a quick-service restaurant is considered “competitive” if it operates within three miles of a Subway restaurant and generates over 20% of its revenue from the sale of any type of sandwich. While certain menu items are excluded, such as hamburgers and burritos, Roark’s chains like Arby’s and McAlister’s Deli could still fit the definition.
Former Republican FTC Chairman William Kovacic emphasizes the importance of considering the perceptions of the merging parties. The restrictions outlined in Subway’s franchise agreement could raise significant concerns with regulators. Roark owns Dunkin’, which might also present a risk as it generates a significant portion of its sales from breakfast sandwiches. Additionally, Roark’s other chains like Sonic Drive-In sell various sandwiches, including chicken and grilled cheese options.
Subway and Roark have declined to comment on the matter. Some experts believe that Subway’s merger with Roark could face challenges due to the perceived contradictions between the merger and the restrictions outlined in Subway’s franchise agreement. Meanwhile, the former Democratic FTC commissioner suggests that Subway’s agreement to a $360 million breakup fee indicates they realize the deal poses substantial risks.
Ultimately, Subway, as the largest fast-food restaurant chain in America, will have to convince regulators that combining with Roark, the owner of Dunkin’, Arby’s, Sonic, and Jimmy John’s, does not create anti-competitive concerns. The deal with Roark was chosen over a lower bid from private-equity firms TDR Capital and Sycamore Partners, which do not own competing chains.
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