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Why Jack in the Box Is Selling Qdoba to Apollo Global

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The deal

On December 19, 2017, Jack in the Box (JACK) entered a definitive agreement with Apollo Global Management to sell subsidiary Qdoba Mexican Eats for approximately $305 million. The transaction is expected to be completed by April 2018. Jack in the Box plans to utilize the net cash proceeds to retire its outstanding debt.

From the above graph, we can see that the SSSG (same-store sales growth) of Qdoba has been on the lower side compared to Jack in the Box, and has been a drag on the company’s top line.

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During the company’s 2Q17 earnings call, the management announced that its valuation multiple was negatively impacted by having two different business models for the Jack in the Box brand and Qdoba. So, to enhance shareholder value, it hired Morgan Stanley in May 2017 to evaluate potential alternatives for Qdoba.

In regards to the sale, Lenny Comma, chair and CEO of Jack in the Box, stated that after evaluating various strategic alternatives, which included a spin-off, a sale, and the refranchising of company restaurants, the board decided to sell Qdoba, as the company wants to move towards a less capital-intensive business model.

History and current operations

In 2003, Jack in the Box acquired Qdoba, which operated 85 locations in 16 states, for approximately $65 million. The brand has grown to operate 385 company-owned restaurants and 341 franchised restaurants by the end of its fiscal 4Q17. In fiscal 2017, Qdoba’s systemwide sales stood at approximately $820 million. During the same period, Qdoba’s peer, Chipotle Mexican Grill (CMG), which owns and operate all its restaurants, posted revenues of $4.4 billion.

Next, we will look at the effect of the sale on Jack in the Box’s stock price.

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