Jack in the Box agrees to buy Del Taco for $575M

QSR chains will combine for 2,800+ locations, $5.1B in system sales

Jack in the Box agreed to acquire Del Taco Restaurants, Inc., the operator of Del Taco, for $575M, including existing debt. The former owner of Mexican fast-casual Qdoba put forth an offer equivalent to $12.51 per share in cash for current Del Taco shareholders. Del Taco, which sold Qdoba in 2017, is now vying for another chance to grow a Mexican quick-service chain, albeit one more closely aligned with its business model, and a majority of locations offering drive-thru service.

Combining two QSRs heavy on drive-thru

In fact, 99% of Del Taco restaurants have drive-thru and the chain has approximately 600 units in 16 states. Off-premises business is robust with extended daypart activity. Del Taco is not unlike Jack in the Box, in the fact it still has runway to grow beyond the West Coast and the Midwest of the country. For instance, the Northeast provides ample opportunity for expansion, as well as the Great Plains and North Central US regions.

After the Del Taco acquisition, the two chains, together, will combine for 2,800 stores across 25 states. Del Taco projects run-rate synergies will total $15M by 2023. The combined companies will produce $5.1B in annual sales and revenue of $1.7B.

Jack in the Box executives note that the they have similar guest profiles and similar employee cultures. According to a presentation by the burger chain, Del Taco has shown consistency in growing its sales and top-line revenue. Del Taco increased sales from $622M in 2013 to $918M (year-to-date Q3) in 2021, with a momentary pause in growth during the pandemic. Revenues rose from $371M to $521M during the same period.

“We are thrilled to welcome Del Taco, a beloved brand and proven regional winner, to the Jack in the Box family,” said Darin Harris, chief executive of Jack in the Box. “This is a natural combination of two like-minded, challenger brands with outstanding growth opportunities. Together, Jack in the Box and Del Taco will benefit from a stronger financial model, gaining greater scale to invest in digital and technology capabilities, and unit growth for both brands. This acquisition fits squarely in our strategic pillars and helps us create new opportunities for the franchisees, team members and guests of both brands.”

Del Taco acquisition rationale

  • Jack in the Box executives expect the translation to be accretive to the tune of single to mid mid-single-digit accretive to earnings per share during the first year (excluding transaction expenses) and meaningfully accretive beginning in year two.
  • Combining two challenger brands, as Jack in the Box describes the two chains, with complementary geographic footprints, guest profiles and menu offerings will create a QSR company with a stronger financial model to deliver growth and increase profits.
  • Jack in the Box suggests it has the potential to mine marketing data in the attractive, tapping an audience within the Mexican QSR category that will help it increase market share in QSR. The two chains may find new ways to tap “secular demographic trends underpinning the category,” according to an announcement.
  • Del Taco and Jack in the Box will benefit from cross-franchising opportunities they can now develop within their aggregate franchise partner base.
  • Jack in the Box will benefit from Del Taco’s established operations, construction, and development expertise to capitalize on its ambitions and realize its long-term objective of 4% annual unit growth by 2025. Del Taco will also leverage Jack in the Box’s broader footprint (25 states vs. 16 states), re-franchising experience, and digital capabilities.
  • Creating economies of scale within supply chain and also in franchising support, the San Diego, Calif.-based burger chain will help provide stronger resources and a more robust economic model at the store level.
  • Jack in the Box expects the combined companies to benefit from a more efficient capital structure. It estimates to keep a leverage ratio within its target range of 4.0x to 5.5x total debt.
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Next steps

David Beshay, a Jack in the Box franchise partner and operator of more than 210 restaurants, added, “I couldn’t be happier about the opportunity that this transaction offers to the franchisees of these two amazing brands. I believe the Del Taco brand will fit hand in glove with ours, and further enhance the strong franchise and guest-focused culture we have worked so hard to develop at Jack in the Box. We are excited about the potential to open Del Taco restaurants, helping the company expand these two beloved brands.”

In 2017, Jack in the Box sold struggling Qdoba to Apollo Management for $305M. Analysts have questioned how the Del Taco acquisition will be vastly different than the marriage with Mexican fast-casual Qdoba.

John D. Cappasola, Jr., president and chief executive of Del Taco, commented, “We are excited to have found a partner in Jack in the Box that shares our vision for the future and has the QSR expertise to further accelerate Del Taco’s growth. In recent years, we have uniquely positioned Del Taco as a leader in the growing Mexican QSR category, expanded our digital capabilities to enhance consumer convenience and focused on growing the brand through franchising, resulting in eight consecutive years of franchise same store sales growth and an accelerating new unit pipeline.”

After approval by shareholders, the transaction should be completed by the end of Q1 2022 after satisfying customary closing requirements and regulations.

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BofA Securities is serving as exclusive financial advisor to Jack in the Box, while Gibson, Dunn & Crutcher LLP is serving as legal advisor. Piper Sandler & Co. is exclusively providing financial advice on the translation to Del Taco, and McDermott Will & Emery LLP served as legal advisor to Del Taco.

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