The Federal Trade Commission has launched an antitrust investigation into Roark Capital’s $9.6 billion acquisition of Subway Restaurants — probing whether the investment firm’s ownership of rival sandwich shops poses competition concerns, a source close to the situation told The Post.
The FTC, headed by 34-year-old Biden appointee Lina Khan, is still gathering information as it reviews the Aug. 24 merger agreement, and has no near-term deadlines — an indication that its review will likely extend into next year, the source said.
Khan’s FTC began a formal investigation earlier this month into the buyout of America’s largest restaurant chain after Roark unsuccessfully tried to get the deal approved in the first initial 60-day review period, Politico reported on Tuesday.
The merger would create a sandwich-slinging colossus commanding more than 40,000 restaurants — three times the number of US locations as McDonald’s.
The private equity firm, which already owns Dunkin Brands, Arby’s, Sonic Drive-In, Schlotzky’s and Jimmy John’s, will not combine Subway and its roughly 20,000 US restaurants with its other chains, Subway CEO John Chidsey has insisted publicly.
Nevertheless, the FTC considers everything a private equity firm owns to be part of the same operation even if they are in different holding companies, sources said.
Meanwhile, 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 in September, 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.”
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.
Subway defined its competition rather broadly so franchisees would not spend money opening other concepts.
“Now the big a–holes have backed themselves into a corner,” a franchisee told The Post on Tuesday.
Roark agreed to pay a relatively large $360 million breakup fee to Subway if it could not complete the buyout in 12 months, indicating that Subway knew the merger had risks.
When the FTC stops a merger from closing so it can examine the deal it is called a second review process and typically means a thorough investigation that will last months.
Neither Subway or Roark returned calls.
The FTC declined to comment.