Jack in the Box to acquire Del Taco for $575 million

After mending fences with franchisees, Jack in the Box made its next big move on Monday by agreeing to buy Del Taco for $575 million, including the assumption of debt.

The acquisition brings together two Southern California fast-food restaurant brands. The combined companies aim to increase profit margins through increased bulk-buying power and deliver $15 million in cost savings over the next two years.

In addition, the merger allows Jack in the Box franchisees to tap a Mexican brand concept to add restaurants — perhaps at lower development costs and with better competitive market dynamics in certain cities.

“The point the company made is two quick-service restaurants are better than one, and I can see some logic in that,” said John Gordon, head of the industry research firm Pacific Management Consulting Group. “This provides the potential for the franchisees of each brand to co-invest, particularly the Jack in the Box franchisees, who have had a good couple of years.”

San Diego-based Jack in the Box will pay $12.51 per share in cash for Del Taco, headquartered in Orange County. That is a 66% premium over the closing price for the fast-food chain’s stock on Friday.

The deal is expected to be completed early next year, pending approval from Del Taco shareholders.

Both Del Taco and Jack in the Box are regional brands. The bulk of their restaurants are in the same states, so the acquisition doesn’t provide much geographic expansion to challenge national heavyweights such as McDonald’s and Taco Bell.

“The bear case here is that you’re paying $575 million for more California markets and California expansion for your franchisees,” Gordon said.

Still, the deal is expected to increase Jack in the Box’s adjusted earnings immediately and help drive the company’s goal of increasing its restaurant footprint by 4% each year starting in 2025, on its way to becoming a national brand.

Founded in 1964, Del Taco operates more than 600 restaurants across 16 states. A little over half are franchise locations, with the rest being company-owned and operated.

Ninety-nine percent of Del Taco locations feature drive-through — a key to success for fast-food restaurants coming out of the pandemic.

Jack in the Box has 2,218 restaurants in 21 states, with 93% owned by franchisees. The combined companies will have restaurants in 25 states.

Jack in the Box has tried a Mexican restaurant concept before. It bought Qdoba, a budding fast-casual chain, in 2003 and built it to 700 locations.

But it ended up selling the chain for $305 million to a private equity firm about three years ago as the fast-casual dining craze lost some momentum.

A new management team led by Chief Executive Darin Harris took over at Jack in the Box about a year ago. Harris spent time repairing strained relations with franchisees, who issued a vote of no confidence against previous company leaders.

Now, Jack in the Box is moving to give franchisees additional options to add restaurants across two brands in markets that they likely already know.

Harris said Jack in the Box and Del Taco shared a “scrappy, innovative, challenger” culture.

“We are a management team that’s focused on aggressively creating shareholder value,” he said. “We are taking action to create value now as we prepare for future restaurant growth.”

Jack in the Box’s shares ended trading down 4% on Monday, at $80.55 on the Nasdaq.