The divestment of the popular hot-dog brand, which the sources said could fetch nearly $3 billion, would come as Kraft Heinz looks to reshuffle its portfolio to focus on more healthy food products as weight-loss drugs weigh on demand for processed foods.

Oscar Mayer has attracted interest from several potential buyers who have submitted initial bids in recent weeks, the sources said, requesting anonymity as the discussions are confidential.

A deal is still several weeks away from being finalized if the talks are successful, the sources added.

Kraft Heinz, which has a market value of nearly $43 billion (C$59.6 billion), is hoping to command a valuation for Oscar Mayer equivalent to about 10 times its earnings before interest, taxes depreciation, and amortization of roughly $290 million (C$401.7 million), the sources said.

Kraft and JBS declined to comment. Sigma did not immediately respond to requests for comment. The Wall Street Journal reported in May that Kraft Heinz was looking to sell Oscar Mayer.

Dealmaking in the packaged food sector has been robust over the past year, as large snacking companies have grappled with lower demand due to the impact of high price inflation and weight-loss drugs.

Family-owned candy giant Mars agreed to buy Cheez-It maker Kellanova in August for nearly $36 billion (C$49.9 billion), in what was one of the biggest packaged food deals of all time. J.M. Smucker acquired Twinkies maker Hostess Brands last year for $5.6 billion (C$7.76 billion).

Under new Chief Executive Carlos Abrams-Rivera, Kraft Heinz has reorganized its brands into three separate portfolios as part of a broader effort to boost the company’s share price, which is down about four per cent this year. It has underperformed the S&P 500 Packaged Foods & Meats index, which has risen about one per cent during the same period.

Oscar Mayer and other non-core brands like cheeses and coffees are currently grouped under the Balance division at Kraft Heinz.

Founded in 1883, Oscar Mayer is an iconic brand known for its hot dogs, cold cuts and bacon. Kraft Heinz wrote down the value of its Oscar Mayer and Kraft brands by $15.4 billion (C$21.3 billion) in 2019 after being hurt by lower demand from consumers.

JBS, which is the world’s largest meatpacker, is controlled by J&F, a holding company owned by Brazilian billionaire brothers Joesley and Wesley Batista. It owns poultry company Pilgrim’s Pride and distributes several other U.S. beef brands including Swift, Certified Angus Beef, Blue Ribbon Beef and Cedar River Farms.

Sigma Alimentos is the food subsidiary of Mexican conglomerate Alfa that produces and distributes meats, cheese, yogurts, and other refrigerated and frozen foods in the Americas, Mexico, and Europe. It has distributed Oscar Mayer products in Mexico since 1993.

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The deal marks the conclusion of a drawn-out auction that started in February and attracted interest from several private equity firms. Reuters reported on Tuesday on a so-called earn-out agreement that was key to Roark clinching a deal for Subway.

For the full deal price to be paid, Subway’s cash flow would need to reach certain milestones over a period spanning two or more years after the deal closes, according to the sources. Without the earn-out, the deal is worth $8.95 billion, the sources said (all figures US$).

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.

The sources said the arrangement helped bridge a gap in the valuation expectations between Roark and the DeLuca and Buck families that own Subway, which started up nearly 60 years ago in Connecticut.

The families were hoping to fetch more than $10 billion for Subway 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.

Roark prevailed over a rival bidding group led by buyout firms TDR Capital and Sycamore Partners, whose final offer was for $8.75 billion including an earn-out, and $8.25 billion without, the sources said.

Roark, which owns other restaurant operators and franchises — including rival U.S. sandwich chain Jimmy John’s — will pay Subway’s owners a break-up fee equivalent to four per cent of the deal’s value should antitrust regulators thwart the deal, one of the sources said.

The deal contact allows for 12 months for the transaction to be completed, according to the sources.

Roark took the view that the restaurant market is too fragmented for the deal to raise competition concerns, the sources added.

Jimmy John’s has more than 2,600 restaurants in 43 U.S. states. Subway has more than 37,000 restaurants in over 100 countries, including 21,350 in the U.S. and 3,135 in Canada.

Roark and Subway, which announced the deal on Thursday, declined to comment on the terms.

Roark currently controls Inspire Brands, the owner of restaurant chains including Jimmy John’s, Arby’s, Baskin-Robbins and Buffalo Wild Wings.

Its experience of helping restaurant brands grow will be helpful, “especially in the U.S. market where it remains well below the peak it hit a few years ago,” said Neil Saunders, managing director of market research firm GlobalData.

Revamping operations

Tax considerations were part of the calculus to sell Subway. This is because the estate of co-founder Peter Buck, who passed away in 2021, donated his 50 per cent stake in the privately-held company to his philanthropic foundation under the terms of his will. This offers a shield from taxes on the sale of the stake.

Founded in 1965 by 17-year-old Fred DeLuca and his family friend 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 per cent 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.

— Reporting for Reuters by Anirban Sen and Abigail Summerville in New York and Deborah Sophia in Bangalore.

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