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Levy Acquisition Corp. to acquire Del Taco

Levy Acquisition Corp. to acquire Del Taco

Deal values chain at $500 million

Del Taco Holdings Inc. will merge with a “blank check” company led by Chicago restaurateur Larry Levy and his family, the company said Thursday, in a deal that values the Mexican quick-service chain at $500 million.

The deal will take Del Taco public through a reverse merger with Levy’s company, Levy Acquisition Corp., or LAC, which currently trades on the Nasdaq stock exchange. LAC will change its name to Del Taco Restaurants Inc. after the merger closes, which is expected in June.

LAC, along with the Levy Family and other investors, will pay a total of $305 million to fund the deal and recapitalize the chain. That includes $150 million from LAC, plus an additional $120 million from the Levy family and other investors to recapitalize the company, and $35 million at closing from additional private investors to fund the cash part of the deal.

After the deal closes, Levy will become chairman of the Del Taco board of directors and will partner with management to oversee the company’s growth.

“We are buying an iconic restaurant company at a very good price,” Levy said in a press conference on Thursday. “We wanted an established business with strong profit, strong cash flows and improving comparable store sales, and ample opportunities for growth. More important, we were looking for one with an experienced management team. After over a year, we found a company in the center of the bull’s-eye.”

Lake Forest, Calif.-based Del Taco was founded in 1964, and is known as a quick-service hybrid, offering a full line of tacos and burritos, along with burgers and crinkle-cut fries.

The chain currently has about 547 locations in 16 states, largely in the Southwest. Del Taco owns more than 300 locations, while franchisees operate the rest. The chain is the second-largest quick-service Mexican chain in the country.

Del Taco has been exploring a sale for months. The chain is owned by a consortium of private-equity firms, including Goldman Sachs, Charlesbank Capital Partners and Leonard Green & Partners. The deal came shortly after the company completed a debt refinancing led by GE Capital.

Del Taco’s management team, led by CEO Paul Murphy, is expected to remain with the company.

“We are very excited to be partnering with Larry Levy and LAC,” Murphy said in a statement. He added that the chain has had 10 straight quarters of same-store sales growth, as well as improving margins and unit volumes.

Levy formed Levy Acquisition in 2013, and raised $150 million in an IPO that year, with the goal of acquiring a restaurant chain.

LAC is known as a “blank check” company, which is a shell corporation that sells stock to public investors with the purpose of acquiring an unnamed company. Such companies are highly speculative, and act similarly to a publicly traded private-equity firm.

After a merger, the acquired company then goes public and assumes the blank check company’s stock symbol.

Del Taco’s $558 million valuation calculates to just less than nine times estimated 2015 adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, the company said.

Del Taco had systemwide sales of $656.1 million in 2014, and same-store sales rose 5.2 percent during the year, according to the company. Average unit volume is $1.2 million. Company revenue has increased 10 percent between 2012 and 2014, to $396 million, from $360.1 million. Adjusted EBITDA has risen 13 percent, to $58.8 million.

The $150 million that LAC has raised will be used to buy $60 million in shares of Del Taco, pay $22 million in transaction fees and be used for general corporate purposes.

The $120 million investment from the Levy family and other investors will be part of a recapitalization of the chain, including $35 million in additional debt, to give the company a stronger balance sheet. The $35 million in additional investment will be used to fund the cash portion of the deal.

Shareholders of Levy Acquisition Corp. are expected to vote on the deal by June.

Murphy said during the conference call that the chain is poised to reaccelerate unit growth. He said the company has the potential to expand to 2,000 locations in the U.S., and has proven its ability to attract sales outside of core markets. He also suggested that there are “opportunities to refranchise stores or markets to accelerate growth.”

“We’re poised to grow from a West Coast icon with a rich history to a strong national brand,” he said.

Del Taco executives said during the conference call that the chain is taking a premium positioning at a low price point. The company has a $6.49 average check, less than $7.20 at Taco Bell and $10.17 at Chipotle. The chain has a tiered menu strategy and an ad campaign highlighting its fresh ingredients, with a tagline “Unfreshing Believable,” to drive traffic.

In addition, most of the locations have been remodeled, and the company has been focused on improving service in part by copying best practices employed by the top-performing concepts.

This story has been revised to reflect the following update:

Update: March 12, 2015  This story has been updated with additional information from Del Taco's press conference.

Contact Jonathan Maze at [email protected]
Follow him on Twitter: @jonathanmaze

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