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After repairing fences with franchisees, Jack in the Box took his next big step on Monday by signing a deal to buy Del Taco for $ 575 million, including taking over debt.
The acquisition brings together two Southern California fast food restaurant brands with roots in the region’s fast food for surfers culture.
The combined companies will aim to increase restaurant profit margins through greater purchasing power and achieve cost savings of $ 15 million over the next two years.
In addition, the merger allows Jack in the Box franchisees to develop a Mexican branding concept to add restaurants – possibly at lower development costs and with better competitive market dynamics in certain cities.
“What the company says is that two quick service restaurants are better than one, and I can see some logic in that,” said John Gordon, director of industry research firm Pacific Management Consulting Group. “This gives franchisees of any brand the potential to invest together, especially jack-in-the-box franchisees who are several years behind them.”
Jack in the Box, based in San Diego, will pay $ 12.51 per share in cash for Del Taco, based in Orange County. That is a surcharge of 66 percent compared to the closing price of the fast food chain’s share price on Friday.
The deal is expected to close early next year, pending approval from Del Taco shareholders.
Both Del Taco and Jack in the Box are regional brands. The majority of their restaurants are in the same states, so the acquisition doesn’t offer much geographic expansion to challenge national heavyweights like McDonald’s and Taco Bell.
“The bear case here is you’re paying $ 575 million to expand California markets and California expansion for your franchisees,” said Gordon.
Still, the deal is expected to instantly boost Jack in the Box’s adjusted profits and help meet the company’s goal of growing its restaurant footprint by 4 percent every year as of 2025 on its way to becoming a national brand.
Del Taco was founded in 1964 and operates more than 600 restaurants in 16 states. A little more than half are franchise locations, the rest are company-owned and operated.
Ninety-nine percent of Del Taco locations have drive-through – a key to success for fast food restaurants that have weathered the pandemic.
Jack in the Box has 2,218 restaurants in 21 states, 93 percent of which are franchise-owned. The combined companies will have restaurants in 25 states.
Jack in the Box has already tried a Mexican restaurant concept. It bought Qdoba, an up-and-coming fast-casual chain, in 2003 and expanded it to 700 locations.
But it ended up being sold to a private equity firm for $ 305 million about three years ago when the fast-casual dining craze lost momentum.
A new management team led by Chief Executive Darin Harris took over the helm of Jack in the Box about a year ago. Harris spent time mending strained relationships with franchisees who passed a vote of no confidence in previous business leaders.
Now Jack in the Box is giving franchisees additional options for adding two branded restaurants in markets they likely already know.
Harris said Jack in the Box and Del Taco share a “scruffy, innovative challenger” culture.
“We are a management team focused on aggressively creating shareholder value,” he said. “We’re taking action now to create value as we prepare for the future growth of restaurants.”
Jack in the Box’s shares ended Monday down 4 percent to $ 80.55 on the Nasdaq.
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