Earlier this week, Jack in the Box Inc. (JACK) – one of America’s leading fast food chains – announced that it plans to acquire its smaller competitor Del Taco Restaurants, Inc. (TACO). The takeover of the smaller competitor, which specializes in Mexican fast food, is costing Jack in the Box a lot. Jack in the Box will have to fork out a hefty $575 million, including debt, for Del Taco.
A Whopping Takeover Premium of 66%
Specifically, Jack in the Box is offering Del Taco shareholders a whopping $12.51 in cash for each Del Taco share. Based on the closing price of the shares last Friday, which was $7.53, the offer includes a takeover premium of a good 66%.
Investors reacted promptly and catapulted the price of Del Taco shares upwards yesterday morning. The share increased by a full 65.6%. Today, it trades at the exact takeover price.
Such a convergence of the share price to the takeover price offered indicates, as experience has shown, that investors expect the deal to go smoothly.
The Jack in the Box share price, on the other hand, lost 4.11% on the NASDAQ on the day of the announcement, exiting trading at $80.55. Investors were apparently not happy by the purchase of the financially struggling Del Taco chain.
A Brief Portrait of the Two Fast Food Chains
Founded in 1951 in San Diego, Jack in the Box Inc. is one of the largest hamburger chains in the USA. The fast food chain operates more than 2,200 restaurants in 21 states and Guam. 148 of which Jack in the Box owns, and 2,071 of which are franchisees. Around 90% of Jack in the Box’s 500 million annual guests buy their menus via drive-in, takeout or delivery.
In fiscal 2020/2021, which ended October 3, 2021, Jack in the Box generated adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) of $331.4 million. That was up just over 20% from $274.2 million a year earlier.
Del Taco was founded in 1964 in Yermo, California, and is headquartered in Lake Forest, California (about 100 km north of San Diego). The approximately 600 Del Taco restaurants in 15 U.S. states see more than 3 million guests every week. The Del Taco fast food stores offer Mexican and American specialties such as burritos and French fries.
About half of the 600 restaurants are ran by Del Taco itself, while the other half are franchises. In fiscal 2020, infamous for the COVID-19 lockdowns, Del Taco earned total revenue of $491.9 million. Adjusted EBITDA was $54.6 million in 2020, down about 14% from a year earlier.
Jack in the Box Expects Profit to Increase
Jack in the Box expects the acquisition to have an immediate positive impact on profits. Further, the San Diego-based franchise chain said the combined company is expected to generate $15 million in savings through supply chain and digital efficiencies by the end of 2023.
The transaction is expected to close in the first quarter of 2022. Jack in the Box will finance the deal by issuing bonds under an existing program.