Del Taco Restaurants Inc. closed on a merger deal Tuesday that will take the company public and repay much of its debt, allowing it to concentrate on something it hasn’t done in a while: Grow.
The Lake Forest, Calif.-based quick-service operator completed its merger with Levy Acquisition Corp., a “blank check” company controlled by the Chicago restaurateur Larry Levy, the company said Tuesday. LAC shareholders approved the acquisition.
Levy took Del Taco public as part of the merger. Perhaps most importantly, the company is free from some of the high-cost debt that kept it from adding units, executives said.
“We’re really now able to execute the next phase of our strategy, to take Del Taco and grow the brand to become a national brand,” Del Taco CEO Paul Murphy told Nation’s Restaurant News. Under the previous owners, “We were a little hamstrung in our ability to grow the brand,” he said.
Levy, who became chairman of the company with the merger, suggested that Del Taco could quadruple in size from its current 550 units.
“We think there is a 2,000-store potential for the brand,” Levy said. “It’s an important national brand that fulfills a very unique niche.”
As a blank check company, LAC sold stock to investors with the goal of acquiring a company. Earlier this year, Levy picked Del Taco. Levy cited the chain’s presence in the Mexican category, the fastest-growing category in the restaurant industry. The chain’s sales growth and potential to expand fit with his goals in acquiring a company, he said.
“I would describe Del Taco as the center of the bull’s-eye with what we were looking for,” Levy said. “They have accelerating same-store sales growth, accelerating customer count growth and a brilliant management team that is very deep.”
By merging with Del Taco, LAC changed its name to Del Taco Restaurants Inc. and changed its ticker symbol on the Nasdaq Capital Market to “TACO.”
As part of the deal, the Levy family and a group of investors purchased $120 million of Del Taco common stock. The funds were used to repay $111.2 million in high-interest debt. Del Taco will repay an additional $68.6 million in debt. The deal also includes $150 million from LAC from the blank check company’s initial stock sale.
Going into the deal, the company had nearly $250 million in long-term debt that generated interest payments of $6.8 million in the first quarter ended March 24. The debt kept Del Taco from spending on new units.
“It’s going to allow Del Taco to grow,” Murphy said. “We throw off strong cash flow. But the cash spent in the past had to be spent to make sure we didn’t let interest get out of hand and overwhelm the brand.”
The company plans to develop restaurants in existing markets this year and next year, when it will also start expanding into new markets, he said.
“The real acceleration will be in 2017, through a combination of new markets and infill strategy,” Murphy said. “We’re excited about the prototype we have out there.”
Being a publicly traded company could help Del Taco towards that goal, Murphy said. The added exposure and credibility has been luring higher-quality operators.
“The quality of franchisees coming into the discussion … has certainly improved over the last few months,” Murphy said. “Part of that is Larry’s reputation. And for the brand, you just get more information out there. The information has been very positive. And people want to be part of it.”
Del Taco was founded in 1964, and serves tacos and burritos along with burgers and crinkle-cut fries. It has restaurants in 16 states and is the second-largest quick-service Mexican chain in the country.
The company had been looking for a buyer for months, when it was previously owned by a consortium of private-equity groups, including Goldman Sachs, Charlesbank Capital Partners and Leonard Green & Partners.
Del Taco’s same-store sales increased 7.7 percent in the first quarter ended March 24, while revenue increased 8.9 percent, to $94.4 million, in the quarter. Its $4.9 million loss in the quarter was due to $6.3 million in transaction-related costs.
Del Taco has had nine straight quarters of same-store sales growth, which Murphy attributed in part to a reimaging program that was completed in 2013.
The chain’s price point is lower than rival Taco Bell, but executives noted that Del Taco’s food is prepared fresh.
“When I first joined the brand — and I’ve been here six years — I was shocked at how many things were done fresh in the kitchen,” Murphy said. “Every day at Del Taco, we’re bringing in raw commodities. We have raw pinto beans, raw chicken we cook every day. We make our own pico. We’re bringing in fresh veggies.”
Levy said: “Because Del Taco is serving fresh food at shockingly low prices, it falls beautifully between Taco Bell, which is serving food from a mechanized kitchen, and Chipotle, which is serving fresh food. Not everyone can afford Chipotle. It fits between them. And they get served quickly with the drive thru.”