Good day, and thank you for standing by. Welcome to the Jack in the Box to acquire Del Taco presentation and Q&A webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Chris Brandon. Please go ahead.
Thanks, Don, and good morning, everyone. Thank you for taking the time on short notice this morning to join us to discuss Jack in the Box's acquisition of Del Taco. With us today on this exciting day for our company are Darin Harris, CEO, and Tim Mullany, CFO. As a reminder, this call will be available for replay, which, in addition to the press release and slide presentation, are available on our investor relations website at jackinthebox.com. We may make forward-looking statements on today's call that reflect management's current expectations for the future, which are based on current information and judgments. Actual results may differ materially from these expectations based on risks to the business. Note that the safe harbor statement in today's news release and the cautionary statement in the company's most recent 10-K are considered a part of today's discussion.
Material risk factors as well as information relating to company operations are detailed in our most recent 10-K, 10-Q, and other public documents filed with the SEC, and are also available on the investor relations section of our website. With that, I'll now turn the call over to Darin Harris. Darin.
Thank you, Chris, and thank you all very much for joining us this morning. We are extremely excited to have the opportunity to speak with you today about our agreement to acquire Del Taco and this new chapter for our company. The transaction marks an important milestone for Jack and brings two like-minded challenger brands together to create a scaled QSR player with a runway for growth and increased profitability. While there were several short and long-term reasons why this is an outstanding brand and business to add to our company, there is one that I hope stands out. We are a management team that is focused on aggressively creating shareholder value. We're taking actions to create value now as we prepare for future restaurant growth.
We are also thrilled at the opportunities this creates for franchisees, guests, and team members, something I will spend more time on throughout our discussion today. In terms of the core Jack brand, make no mistake, we are extremely focused on our core business and confident in our unit growth strategy. Today's announcement, when coupled with our alignment and energy toward growing the core Jack brand, only strengthens our ability to accomplish our goals and reach the true growth potential we know exists for Jack in the Box. I wanted to express my sincere gratitude to our team members and franchise operators. This new partnership would not be possible without their dedication and commitment to advancing our scrappy, innovative challenger culture, one that I am pleased to say Del Taco's talented team also embodies.
You have also seen in the past year the importance I place on relationship building and creating a caring, high-performing culture. I'm very excited to begin that process with Del Taco's franchisees and team members, and to learn even more about the things we have in common and how we will help each other succeed. Before I discuss the strategy and thinking behind the acquisition further, I'd like to turn it over to Tim Mullany to take you through the high-level terms of the transaction. Tim?
Thanks, Darin. Just a few particulars about the transaction, which are also available in a presentation on our website. Jack in the Box will acquire Del Taco for $12.51 per share in cash, for a total value of approximately $575 million, including existing debt. At this price, the transaction values Del Taco at a synergy-adjusted multiple of approximately 7.6x trailing twelve months adjusted EBITDA. As with any successful acquisition, we anticipate meaningful synergies with the addition of Del Taco to our larger platform. We expect to see $15 million in run rate, strategic, and cost synergies by the end of fiscal year 2023, with about half of that achieved in the first year.
The transaction will also deliver immediate earnings accretion, with mid-single-digit accretion expected in year one, growing materially in year two as we fully realize planned synergies. We look to accomplish this while maintaining our investment-grade rating and attractive leverage. This transaction is both strategically and financially compelling. It aligns with our long-term objectives of expanding our reach, increasing unit and company profitability, and building short and long-term shareholder returns. The increased scale created in this transaction improves margin opportunities at both brands and better positions them in today's operating environment. These improvements to our platform will benefit all stakeholders, including franchisees and shareholders. For more on our new brand partner and the deeper strategy behind it, I'll turn it back to Darin.
Thanks, Tim. Let's start with some background about the brand and business that Del Taco, our Southern California neighbors, have built since their founding 57 years ago. Del Taco is the nation's second-largest Mexican QSR chain, with approximately 600 restaurants across 16 states, including 369 in our shared home state of California. 99% of Del Taco restaurants feature a drive-through, which contributes to their strong off-premise sales and diversified daypart mix of breakfast, lunch, and dinner. Like Jack, they are growth-minded and realize it is a brand that should and will eventually be national. Something that will likely sound familiar. Del Taco has a track record of consistent performance and a uniquely loyal guest base with substantial room to grow in new and existing markets. In 2020, average unit volume was approximately $1.6 million.
Franchise same-store sales have grown for eight years in a row, a testament to operational performance of the Del Taco leadership team and their franchisee base. Most importantly, these strong AUVs have historically flowed through to excellent four-wall economics and cash-on-cash returns. It is clear, considering all of this, that Del Taco is the right partner to further scale our business financially, operationally, and culturally. Now, let me explain why. With complementary footprints, guest profiles, and operating models, Jack and Del Taco have much in common, presenting a unique opportunity to scale our business meaningfully and efficiently while also strengthening our combined capital structure and financial flexibility. This critical scale, in turn, creates a stronger QSR player with an enhanced platform for profitable growth.
The transaction not only reinforces Jack and Del Taco's shared nationwide unit growth plans, but it certainly accelerates both brands' abilities to do so more efficiently. Joining forces will provide additional resources to drive innovation to create more unique, innovative menu items and exceptional guest experiences. This will allow Jack and Del Taco to better engage with their existing guests and reach new ones. More broadly, the QSR Mexican category has great potential, and we know a thing or two about how to make a rather legendary taco. After all, we are a burger chain famous for our tacos. Del Taco and Jack both have food our guests crave, and one thing is certain, we believe together we can both compete in the QSR space even stronger. Both brands have made meaningful strides in digital and loyalty and have taken steps to gain momentum on digital adoption.
I'm even more excited that both still have tremendous upside in becoming a formidable, top-tier digital player within QSR. Collaborating on this very important initiative will only help us both rapidly capture the growth potential and trends we have demonstrated recently. For franchisees of both brands, we expect the transaction will result in substantial opportunities for expansion and more favorable unit-level economics. We will also consider refranchising opportunities, something we have experience in doing so with the Jack brand. Supporting this growth is our strong, flexible capital structure, aided by immediate earnings accretion and meaningful synergies. We expect to have the flexibility and additional resources not only to drive expansion and future investment, but to do so more efficiently and profitably. Put simply, this transaction is a win-win for both brands and shareholders while creating opportunities for team members and franchisees.
I want to share how this aligns with our established long-term strategy for growth. At our Investor Day in June, we unboxed our blueprint for the future. Our foundation is built on innovation, technology, and most importantly, serving our people, our guests, and our franchisees well. Atop this foundation sits our four strategic pillars, building brand loyalty, driving operational excellence, growing restaurant profits, and expanding our reach. We are very proud of the progress we've made as a new management team within the past year. As we shared at our recent earnings, our top-line fundamentals and obsession with franchisee restaurant economics put us on a clear, confident path to achieving the long-term growth targets we laid out at the Investor Day. By partnering with Del Taco, our foundation is strengthened by a talented, experienced group of people that share our challenger mentality.
I look forward to both brands sharing knowledge and their unique strengths to help one another succeed. Here's how this acquisition will further our progress on all four of our strategic pillars. On building brand loyalty through growing sales and transactions, we will leverage our combined scale and expertise to reach new guests, creating more unique, innovative menu items, and utilize digital loyalty and data insights to create exceptional guest experiences. We will improve operational excellence and improve our guest satisfaction scores by combining proven outstanding teams and franchise operators, and by encouraging collaboration, we'll share best practices and leverage each other's strengths to improve operational excellence. We have actually identified some early examples of this, particularly related to Del Taco's proven operations, construction, and development expertise.
For growing restaurant profits, which focuses on ways to increase operating margin, we expected to create substantial opportunities to grow four-wall economics through economies of scale and supply chain and utilize scaled pricing power to help offset inflationary pricing pressures. Finally, expanding our reach. Building off the development agreements momentum we have seen at Jack while creating a similar growth strategy to open new Del Taco restaurants as well. This new company will be stronger and smarter when it comes to maximizing the growth of both brands. For Jack, only strengthens our abilities and further reinforces our confidence in reaching 4% annual net growth by 2025. I will turn it back to Tim to talk through what the new business looks like, as well as some additional financial detail before we take a few questions. Tim?
Thanks, Darin. Together, Jack and Del Taco now form a 2,800+ unit strong QSR platform with brand representation across 25 states in Guam, targeting complementary guest profiles. The addition of Del Taco expands Jack's existing footprint and should help to increase brand awareness as we enter into new markets. As we touched on, we will also have the opportunity to tap into the growing and attractive Mexican QSR category, where Del Taco has been the second-largest brand with a long track record of consistent performance. Both brands' franchisees will benefit from enhanced growth opportunities by leveraging knowledge sharing, enhanced scale, technology and digital capabilities. The ability to cross-pollinate franchise systems, reduce upfront new unit costs through shared best practices, and increase operating margins will provide exciting new growth opportunities across the platform. A few additional financial details in closing.
This transaction provides significant earnings potential in the near term, maintains an attractive capital structure, and provides us with increased flexibility to pursue unit growth nationally. We've identified $15 million in run-rate strategic and cost synergies consisting of procurement and supply chain savings, technology and digital efficiencies, and other financial benefits, as well as knowledge-sharing opportunities. We expect to realize approximately half of these synergies in the first year following close, achieving run-rate synergies by the end of fiscal year 2023. The transaction, once completed, is expected to deliver mid-single-digit adjusted earnings per share accretion, excluding transaction expenses in year one, and will be meaningfully accretive beginning in year two as synergies are fully realized.
As a combined company, we also expect to maintain an investment-grade credit rating and stay within our leverage ratio target range of 4.0-5.5x debt to adjusted EBITDA. Based on pro forma figures for 2021, the combined company generated approximately $5 billion in system-wide sales. Lastly, in terms of the path to completion, the transaction is expected to close in the first quarter of calendar 2022, subject to customary closing conditions, including the receipt of Del Taco shareholder approval and certain regulatory approvals. During the closing process, we expect to form an integration management office, including members of both companies, to ensure a seamless transition for all stakeholders and to capture target synergies.
As we welcome the Del Taco team members and franchisees to our system, we recognize that this is a truly transformational moment for Jack in the Box, and one that we couldn't be more excited about. With that, I'll turn it back to Darin to close before we open the line for a few questions.
I appreciate it, Tim. Thank you to everyone joining us today. Since joining the company, we have assembled a strong leadership team with a clear vision and strategic plan for growth. As a result, we've had industry-leading comps on a two-year stack basis, built strong franchise relations, communicated lead indicators related to unit growth in our development agreements and real estate pipeline. This is an accretive transaction and just one more indicator that this leadership team is aggressively changing the trajectory for the growth of Jack in the Box. Lastly, I hope this provided a clear understanding why putting these two challenger brands together is a natural fit that will create strength and an enormous opportunity for all of our stakeholders while further supporting both companies' growth plans already in motion. I will now turn it back over to the operator for a few questions.
Your first question comes from the line of Brian Bittner with Oppenheimer & Co.
Thank you. Good morning and, congratulations on the announcement. Just first, high-level thinking. I think any financially accretive transaction at Jack's current valuation would be and should be arguably applauded by the investment community. I do think first and foremost, investment community may have a bit of muscle memory, still left over from when Jack owned Qdoba. You know, Qdoba was a similar size as Del Taco, similar company operating mix, similar EBITDA generation as Del Taco, and ultimately, it didn't really play out as anticipated despite all the potential synergistic opportunities, and it was forced to be sold. Darin, I know that you and your team are obviously a new leadership group, different way of thinking, different way of executing.
Can you just first and foremost help investors unpack the differences here and why specifically you believe Del Taco will play out differently?
Yeah, great question, Brian. We see this as combining two cultures that are very similar. Challenger brands that really have a focus on growth and increased profitability. I mean, Del Taco is a true QSR with a heavy drive-thru business. It has a strong presence in our geographic markets. Like I said, it's a like-minded brand with complementary culture, similar guest or complementary guest profiles and operating model, and also a geographic complements our current geography. We're confident that this transaction is right for Jack. We know it creates economies of scale, reinforces our unit growth strategies, and we believe will take both of us nationwide.
Thank you for that. Just to follow up, as far as the 4% growth goal by 2025, are you able to say if that now applies to the entire enterprise, or is that still just a Jack in the Box brand target? How can you be assured that the complexities of integrating this acquisition will not impact your focus on executing this all-important Jack in the Box growth plan that you laid out on Investor Day?
Yeah, thanks. Yeah, thanks, Brian. That, it— two excellent questions. First, first off, relative to the 4% growth, this applies to the combined entity. As a matter of fact, the similarities in the development pipelines are pretty telling between Jack in the Box and Del Taco. We're confident more than ever that that 4% by 2025 is achievable, not only for Jack in the Box but also Del Taco. That's one.
We fully understand that the success of any acquisition, this one in particular, is gonna rely on us maintaining a focus on Jack in the Box and to prevent any distractions going forward from our management team, both from a sort of strategic and human resources point of view, but also from a financial point of view as well. We're gonna continue to lean in and invest in Jack development, as well as our strategic initiatives that we laid out on Investor Day.
Great. Thank you. Thank you, Darin. Thank you, Tim.
Your next question comes from the line of Lauren Silberman with Credit Suisse.
Thanks, and also congrats on the announcement. As you were going through due diligence and exploring potential targets, can you talk about the criteria or what you were looking for in a potential brand? Longer term, what's your appetite to potentially bring on another brand strategically? Do you see Jack becoming more of a portfolio or platform company?
Yeah. As we went through this process, we were really excited at looking at Del Taco with the geographic similarities, as Darin just mentioned, how we have an expertise and a dominance in the markets that we operate in. Del Taco has that similar layout and geographical profile. We think that this complements our business model really well. Not only do we know the consumers in these markets, but our franchisees are, you know, similarly knowledgeable about the markets and the customers in that space. You know, this will play really well together with us. We also have that deep understanding of customer segmentation. There's alignment on menu items and supply chain, which was very attractive. As Darin mentioned, you know, they have a 99% drive-through ratio in their business.
We have you know a similar 90% drive-through mix. You know that's a key differentiation from what Brian was suggesting with Qdoba as well. You know this is a natural pairing in our view and very complementary. I'm sorry I missed the second part of your question, Lauren.
Sorry.
Related to, is this a platform for?
No.
for Jack in the Box?
Right. We're, you know, we're just gonna digest this one for now. We haven't laid out any platform strategies for the business as of yet, but we are gonna continue to be opportunistic to drive return on investment and total shareholder value. You know, for now, we're just looking at Del Taco as our singular acquisition.
Yeah. I'd just add to what Tim said is, you know, as we think about Jack in the Box and growing our overall business, you know, what we're gonna do is focus on how do we, you know, create value for our shareholders. You know, TSR and by driving TSR, one of the ways to do that is through programmatic M&A. We're gonna be smart about it. We're gonna evaluate opportunities that make sense when the time comes. You know, we'll see if there's additional future opportunities.
Great. Thank you, guys.
Your next question comes from the line of Brian Mullan with Deutsche Bank.
Hey, thank you, and also congrats from me. Just in terms of the unit counts, Del Taco is currently about a 50/50 mix between company-owned and franchise. Can you just talk about how you would expect that mix to evolve over the next couple of years under Jack ownership? You know, assuming you do ultimately refranchise some of those Del Taco units, you know, who do you expect the most likely buyers to be? Would it be existing Jack franchisees? Would that be your preference? Or maybe there's another way you'd like to go with that and have development agreements attached and things of that nature. Just, that's it for me. Thank you.
Yeah, I appreciate the question. You know, at this point, we won't set specific targets. What I would say is, as you've alluded to, is that Jack in the Box has, you know, experience refranchising. We've executed upon that strategy in the past, and we believe Del Taco and their mix of company or franchise units gives us an opportunity to enhance growth for both brands. Over time, we'll evaluate where and how it makes sense to refranchise some of their units in return for future growth.
Thank you.
Your next question comes from the line of Andrew Charles with Cowen.
Great. Tim, two separate questions for you. First, can we just go back a minute? You know, I know obviously the 4% net restaurant growth by 2025 for Jack's still stands. You know, Del Taco did have the goal of 5% system net restaurant growth by 2023. You know, isn't it, aren't you gonna see the portfolio as a whole, you know, grow somewhere north of 4% given that faster contribution from Del Taco come 2025?
Yeah, I think this is just sort of diluting the pool, right? I mean, Jack in the Box is a much larger base, so you know. I don't wanna, you know, bring it out to the singular digits, but for us, you know, we're maintaining our 4% aggregate combined entity portfolio growth rate by 2025.
Okay. Just the second question is just given the similar footprints for the two brands, you know, they're both attempting to go national, you know, how do you avoid the brand competing for franchisees and make it more complementary growth?
Yeah. I think for us, it gives us huge opportunity. As we've mentioned before, we have plenty of opportunity to grow within our current geography. Both existing franchise systems have tremendous franchisees that have capital and, you know, interest in growing. You know, I think this just enhances the pool of great franchisees to choose from to help us expand restaurants in both, you know, really focused in existing markets but also in new.
Got it. Thanks, guys.
Your next question comes from the line of Greg Francfort with Guggenheim Securities.
Hey, thanks for the question. Darin, can you maybe talk just a little about what segments or what part of the management structure you're gonna view as should be managed separately going forward versus combined as you look at marketing or operations or development? How can we see Jack and Del Taco lining up those and combining some of those functions versus leaving them separate? Thanks.
Yeah, we have internally developed a thesis around what opportunities exist to create synergies. Over the next few months as we look at closing this transaction, we've established an integration office that will dive deeper into specifics around how do we, you know, generate both shared knowledge and also, you know, shared services that make sense for both brands.
Okay, thank you.
This concludes our Q&A portion of today's call. Thank you for participating. You may now disconnect.