Jack in the Box Inc. is working to sell at least 250 restaurants to franchisees after acquiring Del Taco Restaurants in March, a move aimed at maintaining access to cheap credit.
The chain’s $585 million purchase, which focuses on Mexican groceries, expanded Jack’s presence in the box in some US states and solidified its presence in the Southwest and Western regions. Chief Financial Officer Tim Mulaney said the San Diego-based fast-food restaurant group plans to release marketing materials for the remarketing of several of the company’s Del Taco restaurants in about a month.
Tim Mulaney, Chief Financial Officer of Jack in the Box.
Photo: Jack in the Box Inc.
According to Jack in the Box, franchises comprise 84% of the company’s 2,801 locations, up from 93% in February. The transaction added about 300 Del Taco franchised restaurants and about 300 company-owned restaurants to its portfolio. Jack in the Box expects the percentage of franchised restaurants to reach the 93% level within one to three years, but those negotiations are “very arduous,” Mr Mulani said. To reach that percentage, the company would need to sell at least 250 restaurants to franchisees.
“We now have to be very aggressive about refranchising the Del Taco business,” Mr. Mullani said. “Strategically, we think it’s very important to have Asset Light. We would like to move faster.”
Increasing the number of franchised restaurants will reduce the number of jack-in-the-box assets on the balance sheet, allowing the chain to retain access to securitized loans, which are generally cheaper — and more likely — than traditional term loans . Comes with less difficult loan agreements, Mr. Mulani said. However, such a loan is only available to highly franchised companies. He added that having fewer assets also reduces the company’s risk of inflation and simplifies its business model.
Securitized loans are popular with franchise-based restaurant businesses because they offer the franchisor a low interest rate in exchange for a loan that is ultimately guaranteed by high-margin recurring royalties paid by the franchisee. Jack in the Box had $1.86 billion in certificated debt as of July 10, including about $500 million that would have been required to acquire Del Taco, which had no net debt, Mulaney said.
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The company’s debt carries interest at an average interest rate of around 4% and does not mature until 2026, he said. “It’s going to be a long, long time before we get to the more profitable cost of borrowing that we have right now,” he said. Rising interest rates in recent months have made it more expensive for companies to refinance their debt.
Mr. Mulani said he played a key role in the Del Taco integration by serving as co-chair of the integration steering committee with Jack at Box’s head of human resources. The CFO said he oversees a team that evaluates the impact of the refranchise on Del Taco’s structure and another that negotiates with potential franchisees with outside consultants. Mr Mullani declined to name the consultancy.
Jack in the Box is expected to achieve approximately $15 million in total cost savings, including supply chain synergies, in approximately two years after the integration is complete, Mr. Mullani said.
The company plans to spend most of the proceeds from the refranchise to buy back its own stock and pay dividends, Mr. Mulani said. Jack in the Box, which has not repurchased shares since the quarter ended October 2021, has $200 million remaining under its repurchase program, which is scheduled to expire in November 2023.
The company earlier this month reported revenue of $398.3 million for the quarter ended July 10, up 47.8% from the same period last year. About 32% of the quarterly revenue, or $126.3 million, came from Del Taco. Meanwhile, net income fell 42.9% to $22.9 million, driven by rising food and wage costs.
The Del Taco integration could distract the company from increasing revenue for the Jack in the Box brand, said Andrew Charles, senior research analyst specializing in the restaurant sector at investment bank Cowen Inc. “The simplicity of the story of just the one and only Jack there’s a bit of a bias in the box that he needs to focus on a brand new focus,” said Mr. Charles.
Mr. Mulani said the Del Taco acquisition will strengthen long-term growth opportunities for both brands.
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