What happened
Shares of Mexican fast-food chain Del Taco (TACO +0.00%) rallied out of the gate on Monday, gaining a massive 66% as of 2:20 p.m. ET. Meanwhile, shares of burger joint Jack in the Box (JACK 0.58%) fell by as much as 8% at one point in morning trading, though that loss was later pared to just a few percentage points. These price moves actually made a lot of sense given the announcement that Del Taco had agreed to be acquired by Jack in the Box.
So what
It is totally normal for the share price of a company that's making an acquisition to fall a bit. So there's really not too much to say about Jack in the Box's price drop other than that it's understandable given that it just agreed to pay $12.51 per share in cash for Del Taco. Including debt, the total deal is valued at $575 million. Since Jack in the Box will have to come up with a big chunk of cash, investors are pulling back from its shares.
Image source: Getty Images.
Del Taco's massive price advance, meanwhile, brought the shares to just a penny a share shy of the takeout price. This also makes sense given that Del Taco shareholders can expect to collect $12.51 per share when the deal is consummated. The slight discount from that price is also normal, in part because the deal might yet fall through, and in part because of the time between now and when the deal is expected to close.
It's an interesting tie-up, given that it marries together burgers and Mexican food, which aren't exactly a common pairing (though Del Taco's menu already includes burgers). But that's really the point. Jack in the Box is looking to expand its business model beyond the usual burger-adjacent fare, and burritos, tacos, and such are a smart way to go. This growth will give it more purchasing power with suppliers in a way that neither weakens its brand image nor creates a situation where its chains are competing head-to-head with each other.
Jack in the Box is a substantively larger operation, with around 2,200 restaurants across 22 states. Del Taco will add about 600 to that total across 16 states. The two concepts do operate in some of the same states, but there are a number where only one currently has a footprint. So the acquisition will create instant opportunities for expansion with current franchisees that might want to open new restaurants. After that, there will be the opportunity for Jack in the Box to expand its original concept into states where it doesn't yet operate.
Now what
Jack in the Box expects the purchase of Del Taco to be accretive to earnings within a year, with "material accretion" in year two as it benefits from synergies. All in all, it seems like a fairly reasonable deal. That said, for Del Taco shareholders, the big question is whether or not to wait for the deal to close or to just sell and lock in their gains. Given that there's always a risk of an acquisition falling apart, conservative types might want to sell now and look for a new home for the cash. And those investors might want to add Jack in the Box to their short lists, given that it just announced plans to add a new growth platform to its business.
