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Smashburger’s owner wants to buy another chain

Jollibee Foods wants to buy a Mexican concept, and there are plenty to choose from, says RB’s The Bottom Line.
Del Taco

The Bottom Line

In 2014, Philippines fast-food giant Jollibee Foods said it wanted to buy a U.S. restaurant chain. A year later it invested in the Denver-based burger chain Smashburger. Earlier this year, Jollibee upped that interest and now has a majority stake in the concept.

Jollibee apparently isn’t finished. The company now wants to buy another chain. This time, it wants a Mexican concept.

According to the Manila Standard, Jollibee Chairman Tony Tan Caktiong said that the company wants to acquire or form a joint-venture partnership for a Mexican concept. “We want to play in the category,” he said, according to the publication.

Suffice it to say, there are plenty of choices.

Mexican is a rather popular segment. There are 44 Mexican chains among Technomic's Top 500, from the 44-unit California Tortilla Grill to the 6,500-unit Taco Bell.

Of those, 32 are limited-service concepts—14 of which have U.S. system sales between $100 million and $1 billion, which we believe would be Jollibee’s realistic target. Smashburger generated $333 million in system sales in 2017, for instance.

It’s possible, of course, that the company could aim higher, but the only two Mexican concepts with more than $1 billion in sales are Chipotle and Taco Bell, and both would be rather unlikely targets.

And it could aim lower, hoping to catch a concept on the rise.

But a look at those 14 chains demonstrates just how popular this concept is among investors.

Of those 14, four were sold in just the past year-plus: Qdoba Mexican Eats, Cafe Rio Mexican Grill, Fuzzy’s Taco Shop and Torchy’s Tacos.

Three saw significant declines in sales last year: Taco Cabana, Baja Fresh and Freebirds World Burrito all saw sales decline by more than 7% in 2017.

That doesn’t necessarily mean they wouldn’t be sold, and Smashburger has seen its own challenges in recent years. But we’d imagine that Jollibee would prefer a concept not in the midst of a revitalization.

That leaves seven chains that Jollibee could theoretically acquire if it wants to play in the U.S. Mexican category: Del Taco, Moe’s Southwest Grill, Taco John’s, Rubio’s, Taco Bueno, Tijuana Flats and Costa Vida Fresh Mexican.  

Some on that list are more likely than others. Moe’s is part of Focus Brands, owned by Roark Capital. The private-equity group would have to sell all of Focus or split the company up.

The most intriguing name on that list is Del Taco. The company was taken public in a reverse merger in 2015. Its sales have done well in recent years, including 6.2% U.S. system sales growth in 2017.

But it is also trading at an enterprise value multiple of just 9 times earnings before interest, taxes, depreciation and amortization, or EBITDA, and a company like Jollibee could easily best that price. And just like that, Jollibee would be playing in the Mexican category in a big way.

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