The $500 million acquisition of Lake Forest-based Del Taco Holdings Inc. by Levy Acquisition Corp. is set to turn the Mexican-themed fast-food chain into Orange County’s newest public company and pave the way for a growth plan that resembles the path taken by Costa Mesa-based El Pollo Loco Holdings Inc. in more ways than one.
The company that emerges from the Del Taco-Levy deal, which is scheduled to close in June, is expected to run leaner, thanks to plans to pay down $111 million in debt.
From there it seeks to expand from a Southwest base of operations to 2,000 units nationwide.
That looks a lot like El Pollo Loco, which over the past several years has slashed debt, improved operations, and gone public, setting up its push to grow from its core Southwest markets to a chain of 2,300 U.S. units.
One difference for Del Taco is how it’s becoming a public company.
Restaurateur Lawrence Levy founded Chicago-based Levy Acquisition Corp. and took it public in October 2013 as a “blank-check” firm, raising $150 million.
Initial public offerings by blank-check companies like Levy Acquisition come with the legal mandate to buy another company within a certain amount of time—or return IPO proceeds to investors.
Levy Acquisition’s time frame was 21 to 24 months, according to regulatory filings.
“You’ve got to make that acquisition,” said Larry Cerutti, managing partner of Atlanta-based Troutman Sanders LLP’s Irvine office.
He estimated that “only about 10% of the IPO market” are blank-check mergers.
Levy Acquisition Corp. and Del Taco announced the deal on March 12.
A family-led Levy group invested $120 million in the chain on March 23.
The final step is expected in June, when Levy Acquisition Corp. and Del Taco Holdings Inc. combine under the name Del Taco Restaurants Inc., which will trade on the Nasdaq exchange.
Internet investment site chatter suggests the new company will take the ticker symbol “TACO”—a switch from the Chicago company’s current “LEVY”—but Levy and Del Taco declined comment.
Del Taco headquarters will stay in Lake Forest under current President and Chief Executive Paul Murphy, Levy Acquisition Corp. said.
Del Taco is currently owned by several private equity firms, including Goldman Sachs Mezzanine Partners, Charlesbank Capital Partners and Leonard Green & Partners LP.
If the acquisition closes, about 40% of Del Taco would be owned by the Levy family and other new investors, with another 40% in the hands of Levy Acquisition Corp.’s public shareholders. Two private investors would own about 9% of the company, and current Del Taco owners, including management, would have another 11%.
Two Chains
The strategy Del Taco appears set to pursue is similar to El Pollo Loco’s in ways other than its plan to become publicly traded.
El Pollo Loco refinanced its debt twice in the past 18 months and used proceeds from its July 2014 IPO to pay down the $289 million it owed then. It owed about $165 million as of December and has cut its annual interest from $39 million in October 2013 to $4.5 million today.
Del Taco has refinanced its debt twice in two years—$260 million last April after a $215 million round in April 2013. The $120 million investment by Levy investors in March served a purpose similar to El Pollo Loco’s IPO because proceeds were expected to be used to pay down debt. A prime target: $111 million in Del Taco debt that carried a 13% rate, according to Levy Acquisition Corp. President Ari Levy, son of the company’s founder, in a conference call.
He said investments coming as part of the June closing would “likely be used for debt pay-down,” as well.
Interest Costs
Documents provided with the call showed Del Taco’s net annual interest costs at $35.6 million in 2013.
“Interest expense should drop dramatically” going forward, said Eric Gomberg, founder of Dane Capital Management LLC, a New York City hedge fund that has invested in Levy Acquisition Corp.
He said Del Taco was “free cash flow positive” before the March investment and that the merger would likely improve on that. “It should free up incremental free cash flow to make more operational choices.”
Those choices also align Del Taco’s path with that of El Pollo Loco.
Both chains are pushing out from their Southwest origins, El Pollo Loco recently added units in Texas and is planning more in Utah. Del Taco is targeting Georgia, Alabama, South Carolina and New Jersey.
Both chains say they’ve spent the past several years remodeling restaurants, adding fresher food to menus and attempting to carve off a piece of the market between standard fast-food fare and the newer fast-casual trend.
El Pollo Loco has 416 locations—about 40% company-owned.
Del Taco has 547 locations—about 60% company-owned.
One striking difference: El Pollo Loco traded recently at about $26 a share and a $1 billion market value, which is double that of Levy’s pricing on Del Taco.
But even that’s changing.
Since the deal was announced March 12, Levy shares are up 35%.
