Lake Forest-based Del Taco Restaurants Inc. (Nasdaq: TACO) management expects “significant growth opportunities” at Orange County’s fifth-largest restaurant chain once the much larger Jack in the Box Inc. completes a purchase of the Mexican quick-serve business.
San Diego-based Jack in the Box (Nasdaq: JACK) last week announced a deal to buy Del Taco for $455.3 million in cash, equating to $12.51 per share.
Factoring in debt, the deal is worth about $575 million. It would create a combined entity of more than 2,800 restaurants.
The deal, which is expected to close in the first quarter of next year, pulls Jack in the Box into the Mexican QSR space, while giving Del Taco a much larger parent on which the two could find operational efficiencies and leverage each other’s real estate footprints.
The combined company would have $5.1 billion in systemwide sales.
Investors sent Del Taco’s shares up 66% the day of the news. The roughly 600-restaurant chain had a recent market cap of about $455 million.
Jack in the Box, with about 2,200 restaurants, is worth around $1.8 billion.
Day-to-Day Impact
Del Taco CEO and President John Cappasola said in a statement that the deal with Jack in the Box will help to “further accelerate Del Taco’s growth.”
“We expect this transaction will provide Del Taco with the scale, complementary capabilities and opportunity to become even stronger partners to our franchisees and support their ability to drive substantial growth in our core and emerging markets,” the CEO added.
It’s unclear what, if any changes, will occur on the management side at Del Taco following the transaction’s close. Â
Del Taco, through a spokesperson, declined comment.
While the news “means there will be a change in the ownership of our company, there will be little to no immediate impact on the day-to-day operations of our business,” Cappasola told employees and franchise owners in a letter last week.
“Jack in the Box was attracted to Del Taco due to the success we have had as a company and the performance of our team,” wrote Cappasola, who was named CEO in 2017.
With last week’s stock boost following the sales announcement, shares in the company, which employs about 3,000 in OC, are about the same price as they were at the time of his hiring.
Jack in the Box CEO Darin Harris told analysts on a call last week that a division has been set up to look over the next few months into what aspects of each business, from marketing to development, could be combined and what would continue to operate separately going forward should the deal close.
Synergies
While the menus of both West Coast-focused companies differ, the key similarity is their drive-thru business.
For Del Taco, 99% of its restaurants have a drive-thru; Jack in the Box is about 90%.
The drive-thru and off-premise factor is a point of differentiation in this acquisition versus Jack in the Box’s previous ownership of Denver burrito chain Qdoba Restaurant Corp., which it sold to Apollo Global Management in 2018 for $305 million, amid activist investor pressure. Jack in the Box bought the company in 2003 for $45 million.
Harris assured analysts the Del Taco deal makes sense due to shared cultures, heavy drive-thru businesses, similar consumer bases and complementary real estate footprints.
“More broadly, the QSR Mexican category has great potential and we know a thing or two about how to make a rather legendary taco,” Harris said in a prepared statement, pointing out Jack in the Box is “a burger chain famous for our tacos” in referencing the chain’s well-known deep-fried tacos.
Harris is relatively new at Jack in the Box, after being hired to lead the chain in April 2020. He is the former CEO of CiCi’s Pizza and has also worked at Arby’s Restaurant Group Inc. and Captain D’s Seafood Inc.
Harris is “a tremendous leader who in a short time at Jack in the Box has made a huge impact on the brand,” Cappasola told employees and franchise owners last week. “Our senior leadership has spent considerable time with their senior team throughout this process and I can confidently say we share a similar approach to the business.”
Growth Prospects
Coming under the umbrella of a larger parent could help Del Taco see scale at a faster clip.
The two brands combined are estimated to see overall growth of 4% by 2025. How much of that comes from Del Taco remains to be seen, but Jack in the Box management acknowledged “significant white space” in both the markets where Del Taco already does business and new ones.
Del Taco, with systemwide sales of $918 million for the 52 weeks ended Sept. 7, averages $1.6 million in sales per restaurant. Franchisees have consistently turned in same-store sales growth for the past nine years.
Systemwide sales under Cappasola have grown about 17% since he became CEO. An average order at one of the company’s restaurants ran a little under $10 last quarter, he said in October.
More recently, Del Taco has focused on leveraging the momentum around digital via its app, loyalty program, curbside pickup testing and a relatively new Fresh Flex design that takes into account mobile orders and delivery in a bid to offer customers convenience.
At the same time, the company has long focused on telling its story around value.
“For us, the unique differentiator is that value-oriented differentiator. That’s a big piece of building the brand,” Cappasola told the Business Journal in March. Â
