Apollo Global Management LLC, a private equity firm co-founded and run by Leon Black, has agreed to buy the Qdoba restaurant chain from Jack in the Box Inc. reported Bloomberg. The restaurant chain is being bought for $305 million in cash, announced Jack in the Box on Tuesday.
Qdoba is a chain of Mexican restaurants that has been posting declining sales for three of the last four quarters. The restaurant chain is a direct competitor of Chipotle’s and has 725 outlets across the US. According to Jack in the Box, the company has been considering selling Qdoba as they feel that having two different business models has been weighing them down. The company runs its flagship burger business and this Mexican business.
According to Jack in the Box, their Board of Directors agree that letting go of Qdoba would help the company move to a less capital-intensive business model and, at the same time, increase value for the shareholders.
According to Fortune, Jack in the Box prefers a franchise model to work with. This can be seen from the fact that only 47% of Qdoba stores are franchised, but more than 88% of Jack in the Box restaurants are under franchise. Selling off Qdoba will be in line with the company’s desire to be less capital-intensive.
In a more detailed report Nation’s Restaurant News said that this deal was expected to close by April 2018. Qdoba’s same-store sales were down 2.1% in the fourth quarter that ended in October. The chain also marked a 4% decline in company-owned stores.
Lenny Comma, CEO and Chairman of Jack in the Box stated that the company had bought Qdoba in 2003, when it comprised of 85 stores over 16 states and was generating about $65 million in revenue. He said that in the last 14 years, the restaurant chain has grown at a compounded per year growth rate of 16%. Today, Qdoba has a presence in 47 states as well as in the District of Columbia and Canada and has a sales of about $820 million for 2017.
The Qdoba Franchise Association (QFA) based in Kennesaw, Georgia has stated that it supports the proposal. According to Ron Stokes, Chairman of the Association as well as owner of 56 franchises, this deal is a positive move as it will encourage hope and excitement as well as increase growth potential among the franchise community.
The QFA stated that it was looking forward to working with Apollo and were hoping for a collaborative partnership. They were optimistic about the kinds of opportunities that would become available to the franchises through the private equity firm.
After the news release, Jack in the Box’s share prices went up by 4.4% to $104.75. This year, the company’s share prices had dropped by 10%. The company, with more than 2,200 restaurants, has been struggling due to increasingly intense competition in the burger business.
McDonald’s is seeing a comeback with its upgraded and redesigned menu, and competition from its closest rivals Burger King and Wendy’s is also intense. The biggest challenge is that there has been hardly any growth in the fast-food businesses; visits have been flat for some time now. The way that the fast-food chains have been attracting customers is via heavily discounted food and big promos. Which has made it really tough for smaller chains like Jack in the Box to compete.
Jack in the Box stated that it was going to use the proceeds from this sale to finish off outstanding debt which was under its term loan.