Jack in the Box’s (NASDAQ: JACK) acquisition of Del Taco (NASDAQ: TACO) is valued at approx $575 million, a significant premium compared to where shares were trading previously, which caused the spike in Del Taco’s shares on Monday. The companies will now operate a combined 2,800 chains across 25 U.S. states, with the deal expected to be finalized in early 2022.
What does the acquisition mean for investors?
Del Taco investors that picked up shares in the last year have already made their cut off of the deal, but it has not yet been revealed if shares will be transferable and eventually trade under the one ticker.
Benefits for investors
The benefits of the deal will be the expansion of market share for the new combined company in geographical zones where it already has a strong presence, and both chains will be able to benefit from brand loyalty, economies of scale, and shared industry insights.
Another advantage is exposure to the Mexican food category, which is one of the fastest-growing segments in the industry.
According to CEO Darin Harris,
“This is a natural combination of two like-minded, challenger brands with outstanding growth opportunities”.
I’m a little skeptical, which leads me to the risks.
Risks for investors
In regard to the like-mindedness of both companies, they do appear to be a good cultural fit. However, the growth opportunity is highly questionable. Jack in the Box grew sales year-over-year by only 0.2% in its most recent quarter, and Del Taco’s sales growth was just 1.8% YoY in Q3 compared to the year prior. I would call this stagnation, not an outstanding growth opportunity.
Increased wage expectations as a result of ‘The Great Resignation’ are bound to impact both business models with higher labor costs too, as well as inflationary concerns that would likely put pressure on margins. That doesn’t even take into account current supply chain constraints weighing on industries and the ongoing pandemic distress that has caused many to avoid restaurants entirely.
This could be a reasonable opportunity for someone to get exposure to the fast-food industry in their portfolio, however, personally, I would opt to invest in one of Jack in the Box’s larger competitors that offer a similar dividend and have a better brand presence with international operations, if I was to go that route.
Until the proposed “synergies” come to fruition, I would be steering clear from both companies, that, in this environment, face enormous competition from well-capitalized fast-food chains such as McDonald’s, Chipotle, and Domino’s, just to name a few.
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Financial Writer at MyWallSt
David's favorite stock is Google. He's a daily user of its YouTube platform, where you can learn or find something brand new at the touch of a button. He believes the company will continue to grow for many years to come.