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JACK’s Acquisition of Del Taco: Worth Sinking your Teeth Into?
Stock Analysis & Ideas

JACK’s Acquisition of Del Taco: Worth Sinking your Teeth Into?

The restaurant industry was badly affected by the COVID-19 pandemic as pandemic restrictions resulted in restaurants being closed for dining in, with only takeaway and food delivery available. According to a Statista report, the fast-food industry suffered around a 20% fall in restaurant traffic last year.

However, this year, this industry could be worth $296.5 billion, according to a Statista estimate. It also seems that QSR chains are looking at expanding their footprint inorganically through the acquisition route.

In this article, we will look at Jack in the Box’s acquisition of Del Taco and examine each of these companies in-depth.

Jack in the Box (JACK)

Yesterday, Jack in the Box, a quick-service restaurant (QSR) chain, announced the acquisition of Del Taco Restaurants (TACO) in a transaction valued at around $575 million, including TACO’s existing debt.

As per the terms of the transaction, JACK will acquire TACO for $12.51 per share in cash, and the acquisition is expected to close in the first quarter of next year.

Darin Harris, CEO of Jack in the Box, commented about the acquisition, “This is a natural combination of two like-minded, challenger brands with outstanding growth opportunities. Together, Jack in the Box and Del Taco will benefit from a stronger financial model, gaining greater scale to invest in digital and technology capabilities, and unit growth for both brands.”

Investors seem to be optimistic about the acquisition, as the stock was up 5.5% in early trading.

Even Wedbush analyst Nick Setyan viewed the acquisition announcement as a favorable one, adding that JACK’s current valuation “discounts an overly pessimistic view of management’s ability to achieve unit growth acceleration and sustained SSS [ same store sales] growth over the longer-term.”

Regarding growth over the longer term through this acquisition, Jack in the Box expects to achieve run-rate strategic and cost synergies of around $15 million by the end of FY2023, with “approximately half of the synergies achieved in the first year.”

Analyst Setyan believes that there is a compelling value in TACO’s company units and a refranchising strategy could result in “unit development towards a 4%+ TACO run-rate by CY2023.”

However, the analyst does not expect “JACK to pursue an immediate or full refranchising strategy” but expects the management “to be thoughtful and strategically focused on reaping the most advantageous commitments from any future refranchisings.”

JACK’s refranchising strategy is that the company leases out its existing restaurant location to its franchisees.

What’s more, Setyan estimates that JACK’s ambition of achieving a long-term net unit growth of 4% by 2025 is unlikely to be adversely affected “if JACK franchisees spend capital on Del Taco acquisitions or Del Taco unit growth.”

While this acquisition is likely to put JACK’s stock buybacks on hold over the near term, the analyst strongly believes that “the TACO acquisition will prove more valuable for shareholders over the medium- to longer-term.”

As a result, the analyst continues to remain upbeat about JACK with a Buy rating and a price target of $110 (36.6% upside) on the stock.

However, an analysis of the JACK stock’s holdings among TipRanks Smart Portfolio investors reveals that Investor sentiment regarding the stock is very negative. Among 524,349 portfolios analyzed by TipRanks, portfolios holding JACK have declined by 24.3% in the past 30 days.

Overall, looking at the JACK stock forecast, the rest of the analysts on Wall Street are cautiously optimistic about Jack in the Box, with a Moderate Buy consensus rating based on 7 Buys, 6 Holds, and 1 Sell.

The average price target of Jack in the Box of $111.69 implies 38.6% upside potential to current levels.

Del Taco Restaurants (TACO)

Investors cheered the news of the acquisition as the stock soared 66% yesterday to close at $12.51. Del Taco is the second largest QSR chain in the growing Mexican food QSR space. The company has more than 603 units, with a strong presence in California.

It is important to consider here that Del Taco announced in its Q3 press release that year-to-date, the company has signed seven franchise development agreements for 53 new Del Taco restaurants across 6 states in the U.S.

John D. Cappasola, Jr., Del Taco’s President and CEO, commented on these franchise agreements on its earnings call, saying, “These new development agreements expand our pipeline and further support our ability to deliver 5% systemwide new unit growth led by franchising beginning in 2023.”

According to Wedbush analyst Nick Setyan, this acquisition is taking place because the management of TACO was in a Catch 22 situation, as “it couldn’t give up any more EBITDA given its market cap despite understanding the value in refranchising and it wouldn’t get a respectable [EV/EBITDA] multiple at a 50/50 unit mix despite solid fundamentals.”

Here, Setyan is referring to the fact that TACO’s market cap of $275 million before the acquisition  “was lower than the proceeds TACO would receive if it refranchised its company units (>$300M).”

Moreover, the analyst is optimistic that given the “alignment across the brands’ geographic footprint (and HQ’s), and potential synergies at the unit level around the supply chain, we would be surprised if the opportunity is not >$15M.”

Setyan also considers it highly unlikely that there would be a competing bidder for the acquisition.

In view of this acquisition, Setyan downgraded the stock from a Buy to a Hold and lowered the price target from $15 to $12.50 with the stock priced in at current levels.

Investor sentiment is also positive regarding the stock. An analysis of the TipRanks’ Smart Portfolio reveals that out of 524,349 portfolios, investors holding TACO stock rose 4% in the past 30 days.

Overall, looking at TACO stock forecast, the rest of the analysts on Wall Street are sidelined about Del Taco, with a Hold consensus rating, based on 4 Holds. The average Del Taco price target of $12.34 implies a 1.4% downside potential to current levels.

Bottom Line

It appears that more or less, Wall Street has viewed the news of the acquisition positively. But Cowen analyst Andrew Charles had mixed feelings about the acquisition.

The analyst opined that the acquisition “naturally poses distraction risk as the Jack brand builds to 4% net restaurant growth in 2025, on an LTM [long term margin] basis TACO represents only 15% of pro-forma EBITDA and will likely be a smaller mix over time as the concept is presumably refranchised.”

Despite his reservations, the analyst retained a Buy rating and a price target of $130 (61.4% upside) on the stock.

Disclosure: At the time of publication, Shrilekha Pethe did not have a position in any of the securities mentioned in this article.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates.  Read full disclaimer >

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