Blackstone still has a hearty appetite for investing in restaurant chains as it looks to buy a majority stake in Jersey Mike's Subs for a reported $8 billion — marking the latest deal by a private-equity firm aiming to supercharge a growing company's brick-and-mortar expansion.
New York-based giant Blackstone said it reached an agreement for the majority ownership position in Jersey Mike’s, the fast-casual chain that touts its freshly prepared submarine sandwiches. The company — the second-biggest U.S. sandwich chain with headquarters in Manasquan, New Jersey — is a national franchisor with more than 3,000 locations open and in development.
The acquisition "is intended to help enable Jersey Mike’s to accelerate its expansion across and beyond the U.S. market, as well as its continued investment in technology and digital transformation," Blackstone said Tuesday.
Private-equity firms with deep pockets such as Blackstone have been drawn to franchisors, particularly in the dining sector, where they can fast-track a promising chain's brick-and-mortar growth, both nationally and internationally, William Densmore, a senior director at Fitch Ratings, told CoStar News. A few months ago, Roark Capital completed its $9.6 billion acquisition of Subway, the largest sandwich chain with about 37,000 restaurants. In 2019, Roark-backed Inspire Brands purchased Jimmy John's Sandwiches, another leader in the sandwich-shop dining sector.
Blackstone has a track record of financially backing franchisors. In February, it said it had made a growth equity investment in 7 Brew Coffee, a drive-thru beverage business. Then in April, the firm announced it was acquiring the Tropical Smoothie Cafe chain, for a reported $2 billion.
Blackstone's prior franchise acquisitions include its 2007 deal for Hilton Hotels, and its purchase of cleaning- and emergency-restoration services provider Servpro in 2019. The company's buying binge this year has included a deal to take Retail Opportunity Investments Corp., a retail landlord, private in a $4 billion transaction.
"Blackstone has a long history of successfully propelling the growth of leading franchisors," the private-equity firm said in its statement.
But Blackstone is placing its big bet on Jersey Mike's at a time when the restaurant industry has been roiled by change and challenges, including bankruptcies, the closing of hundreds of locations and consolidation, with operators such as Darden Restaurants in the process of acquiring the Tex-Mex chain Chuy's Holdings. And Jersey Mike's top competitor, sandwich-shop leader Subway, isn't sitting on its laurels. It is in an international growth mode and last week unveiled a new global restaurant design that it said seeks to improve the ambiance of its restaurants and "future proof" its business.
Accelerating expansion
Even so, the cash flow and potential growth of franchised businesses appeals to firms like Blackstone, according to Densmore.
"Cash is king," he said. "But what is particularly important for them is, and they mentioned this in their press release, to accelerate expansion, either within the U.S. or abroad. ... They view this as a healthy winning brand, but does it have legs to grow? And in this case, they say yes. They believe they can take it from roughly 3,000 restaurants to 4,000 in the U.S. And I'm not familiar with how much they are international, but certainly, we're seeing opportunities for brands to go international and keep that kind of growth element going."
Though the restaurant industry has had setbacks this year, companies like Wingstop, Chipotle Mexican Grill and Jersey Mike's have seen success, Jose Rivas, a Fitch senior analyst, told CoStar News.
"Effectively, the sector overall has been struggling this year," he said. "But there have been winners and losers in this business. ... We have good examples of companies outperforming the overall industry in terms of traffic and same-store sales."
Blackstone's pending acquisition of Jersey Mike's was earlier reported by The Wall Street Journal, which valued the deal at roughly $8 billion, including debt. Blackstone and Jersey Mike's didn't disclose the terms of their transaction.
Jersey Mike’s founder and CEO Peter Cancro will keep a significant equity stake in the chain and continue to lead the business, according to Blackstone. Cancro is enjoying the fruits of his labor. He began working at the company’s original Point Pleasant, New Jersey, location — founded in 1956 as Mike’s Subs — when he was 14. He acquired that location in 1975 at age 17 and began franchising units in 1987.
Seeking growth
"We believe we are still in the early innings of Jersey Mike’s growth story and that Blackstone is the right partner to help us reach even greater heights," Cancro said in a statement. "Blackstone has helped drive the success of some of the most iconic franchise businesses globally and we look forward to working with them to help make significant new investments going forward.”
But investors haven't been pleased with all the sandwich-shop chains. Last month, one of Chicago-based Potbelly's major shareholders called for the chain to undertake a strategic review process to evaluate a sale of its entire business, noting that private-equity firms have been eager buyers of restaurant chains. That shareholder group, Immersion Investments, in a letter to Potbelly's board said even through the chain was performing well, it was extremely undervalued by Wall Street.
"There is ample private and strategic interest in growing restaurant businesses, especially ones exhibiting franchise-led growth," Immersion said in its letter. "Given the unlevered balance sheet, we believe there is significant interest from private equity. Additionally, a sale would allow the company to easily refranchise the existing store base, which creates substantial noise in reported financial results and is generally more difficult to execute and properly communicate as a publicly traded business."
The Jersey Mike's sale is expected to be completed in early next year.
Blackstone said that its private equity strategy for individual investors is also expected to take part in the transaction.
"Blackstone has deep experience helping accelerate the expansion of high-growth franchise businesses and this area is one of our highest-conviction investment themes," Peter Wallace, a senior managing director at the firm, said in a statement.
For the record
Guggenheim Securities and Morgan Stanley & Co. are acting as financial advisers and White & Case served as legal counsel to Jersey Mike’s. Barclays and Bank of America are acting as financial advisers and Simpson Thacher & Bartlett served as legal counsel to Blackstone.