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Analysts acknowledge that investors may still be traumatized by Jack in the Box Inc.’s ownership of the Qdoba chain of Mexican restaurants, but they’re upbeat about the latest news of the Del Taco Restaurants Inc. acquisition.
Jack in the Box
JACK,
announced Monday that it would purchase Del Taco
TACO,
in a deal valued at about $575 million, including existing debt. Del Taco has about 600 restaurants across 16 states, with a drive-thru at most locations.
Together, the two companies will have more than 2,800 restaurants spanning 25 states. Jack in the Box expects the deal to be mid-single-digit accretive to earnings during the first year, and “meaningfully” accretive in the second year.
“This transaction combines two challenger brands with complementary geographic footprints, guest profiles and menu offerings to create a scaled QSR player with a stronger financial model to drive growth and enhanced profitability,” Jack in the Box said in the announcement.
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The acquisition will also afford “the financial resources to pursue a wider set of opportunities for profitable growth,” the company said.
The immediate reaction to the news from investors wasn’t optimistic, with Jack in the Box shares closing down Monday 4.1%. The stock has rebounded Tuesday, up nearly 6%.
“Longtime followers of the Jack in the Box story are quick to point out the pitfalls and parallels between this acquisition and its previous ownership of Qdoba,” wrote KeyBanc Capital Markets.
Jack in the Box bought Qdoba in 2003 and sold it in December 2017. In the time since, Jack in the Box has explored the options for selling itself.
“In the past, the company struggled to drive growth at Qdoba, while also losing focus on Jack in the Box, which had difficulty competing against larger chains and saw roughly flat net unit growth for several consecutive years,” analysts led by Eric Gonzalez wrote.
But now, Jack in the Box has different management and a different reason to make an acquisition.
“Jack in the Box purchased Qdoba as a growth vehicle to supplement what was then a mature brand. In purchasing Del Taco, the company is opportunistically purchasing a well-regarded but underappreciated regional quick service chain with similar brand attributes, a heavy off-premise mix, and solid fundamentals/unit growth prospects at a time when the foundation for Jack in the Box’s accelerated growth has already been set.”
KeyBanc expects Jack in the Box to sell a large number of the 297 company-owned Del Taco locations to franchisees and find synergies to drive the earnings-per-share accretion.
“While Jack in the Box has been cited as a potential acquisition target in the past, we believe this deal signals it is more likely Jack in the Box could look to build a multi-concept portfolio,” wrote Credit Suisse’s Lauren Silberman in a note.
“We note this deal is reminiscent of the strategy previously pursued by Jack in the Box with Qdoba, and comes at a time when Jack in the Box is looking to drive meaningful inflection in unit growth, which could pose some distraction risk.”
Credit Suisse rates Jack in the Box stock underperform with a $99 price target.
That “distraction” is also one of the reasons cited in a Truist Securities note.
“Both Del Taco and Jack in the Box are regional concepts with national growth aspirations, which investors are justifiably cautious of, given the difficulty of regional brands expanding nationally,” analysts led by Jake Bartlett wrote.
But analysts think Jack in the Box and Del Taco are compatible in a number of ways.
“However, we believe Del Taco is a much better fit since its operates in Jack in the Box’s segment (fast food vs. fast casual), which targets similar consumers and similar real estate (drive through locations) and operations are located in close proximity (Qdoba was headquartered in Colorado).”
Truist rates Jack in the Box stock buy with a $130 price target.
Jack in the Box stock is down 8.6% for the year to date. Del Taco stock is up nearly 38% for 2021. And the S&P 500 index
SPX,
has gained almost 25% for the period.
