Dive Brief:

• Jack in the Box has entered into a definitive agreement to purchase Del Taco for $575 million, or $12.51 per share in cash, the companies announced Monday. The transaction is expected to close during the first calendar quarter of 2022. 
• Combined, the companies will have over 2,800 restaurants across 25 states. The two chains plan to expand their footprint and develop new menu offerings. 
• Both brands have had similar strategies in the past 18 months, adding new loyalty programs and focusing on unit development, with Jack in the Box restarting franchise development and Del Taco deploying new prototypes and expanding through Reef.

Dive Insight:

In previous years, both Del Taco and Jack in the Box were once rumored to consider sales of themselves, but a deal to bring the two together could help the chains, which have a lot of business strategies in common, eventually go national. 

While Jack in the Box currently operates in 21 states, the lion share are in California. With this deal, it hopes to leverage Del Taco's operations, construction and development expertise to drive toward its goal of 4% annual unit growth by 2025. The restaurant chains share 12 markets, most in the West, but Del Taco has a presence in Michigan, Alabama, Georgia and Florida, according to an investor presentation, which could provide potential opportunities in those markets for Jack in the Box.

"We have plenty of opportunity to grow within our current geography. Both existing franchise systems have tremendous franchisees that have capital and interest in growing, and I think this just enhances the pool of great franchisees to choose from to help us expand restaurants … in existing markets, but also new," Tim Mullany, EVP and CFO at Jack in the Box, said Monday during an investor call about the deal. 

Both companies also have made significant strides in digital and loyalty, executives said. During the company's fiscal 2021, Jack in the Box grew its digital sales by 90.6%, with its loyalty program leading to a 61% increase in app downloads, according to the company's Q4 2021 earnings call. Del Taco expects its loyalty program, which launched in September, to provide access to customer data to allow it to improve its personalization efforts, according to Del Taco's Q3 20221 earnings call. 

"I'm even more excited that both still have tremendous upside and become a formidable … digital player within QSR," CEO Darin Harris said during the call. “Collaboration on this very important initiative will only help us both rapidly capture the growth potential and trends we have demonstrated recently."

The two have heavy drive-thru capacity as well. About 99% of Del Taco's stores have drive-thru, while 90% of Jack in the Box units offer the service, Mullany said. 

"Del Taco is a true QSR with a heavy drive-thru business that has a strong presence in our geographic markets," Harris said. "We're confident that this transaction is right for Jack. We know it creates economies of scale."

Jack in the Box, however, may have to overcome negative perceptions over its sale of Mexican fast casual Qdoba, which it owned for 15 years. 

Harris assured investors Monday this transaction would be different than Qdoba, which the company sold for $305 million to Apollo Global Management in 2018 after it was hit with slumping sales, rising avocado prices and increased wages hurting earnings.  

Jack in the Box expects to form an integrated management office, which will have members from both companies, Mullany said. The company will look at how it can generate shared knowledge and shared services that make sense for both brands, he said.