Why Jack in the Box had to sell Qdoba

The sale came with activists circling, but forced deals aren’t always the best option.

Jack in the Box finally sold Qdoba, its secondary, burrito concept that it has owned for more than 14 years, for $305 million earlier this week.

In so doing, it became the last burger chain to unload a fast-casual burrito chain that it had acquired in the late 1990s or early 2000s in the name of growth. In 2006, Wendy’s sold Baja Fresh, and McDonald’s spun off Chipotle in an IPO.

Jack in the Box, much like McDonald’s and Wendy’s, made this move to focus on its core concept. And, also like McDonald’s and Wendy’s, Jack is doing that with activist investors lurking in the background.

It’s a common refrain among publicly traded restaurants. A restaurant chain starts to struggle. Activist investors smell blood in the water and start buying up stock. Corporate boards, fearing for their seats, begin taking actions to create “shareholder value.” One of the easiest moves is to sell secondary concepts.

In May, the activist hedge fund Corvex Management revealed a $57 million stake in Jack in the Box.

That very month, the chain said it might sell Qdoba, announcing that it planned to explore strategic alternatives for the concept. That included a possible sale, though Jack could have refranchised the chain. At the time, Jack in the Box remarked that Qdoba, which is more than 50% company-owned, is different from its mostly franchised core burger brand.

Indeed, buyer Apollo Global Management could sell company-owned stores to franchisees, which could help the private-equity firm recoup much of the $305 million it’s paying for the chain. Apollo could then concentrate on franchising and find ways to improve unit volumes—at less than $1.2 million per unit, according to Technomic Insight data, they are nearly 40% less than rival Chipotle, even after that chain’s sales plunged 20% last year.

There’s no good reason that Jack in the Box couldn’t do this. After all, Jack only recently sold hundreds of restaurants to franchisees and could have done the same at Qdoba.

And many limited-service franchisors make it work by owning multiple concepts: Yum Brands, for instance, or Restaurant Brands International, operator of rival Burger King. Heck, Arby’s recently bought casual-dining chain Buffalo Wild Wings and was celebrated for it.

But more activists have since taken positions at Jack in the Box.

Jana Partners, for instance, has invested $134 million into Jack. Jana is known for pushing chains to sell concepts or their entire company. It did this with Whole Foods earlier this year, and has an activist position with Outback owner Bloomin’ Brands.

And the investor Starboard Value, which won every board seat in a 2014 proxy fight with Darden, revealed in November that it owns $175 million worth of Jack in the Box stock.

The prospect of more activists pushing changes and potentially taking board positions gave Jack in the Box little choice but to sell Qdoba in the name of “shareholder value.”

To be sure, Jack made out a lot better than Wendy’s, which bought Baja Fresh for $275 million in 2002 and sold it four years later for $31 million. Other chains have sold secondary concepts at bargain basement prices in the name of improving core operations.

Jack in the Box, by contrast, bought Qdoba for $45 million in 2003, helped the chain grow and sold it for $305 million.

That price is seven times Qdoba’s earnings before interest, taxes, depreciation and amortization, or EBITDA, according to Jefferies analyst Alexander Slagle. That’s probably low, considering that Buffalo Wild Wings received a multiple of 10, and the average multiple for deals this year is about 12, according to Bernstein Research.

The ultimate question, however, is how Jack in the Box performs. Jack is a much larger chain, with 2,255 locations to Qdoba’s 700. But its same-store sales have struggled in the past three quarters as McDonald’s and Wendy’s all perform strongly at the same time. And Jack’s growth is proceeding much more slowly: In 2016, the chain added just six U.S. units. The chain has done little in international markets.

Perhaps the focus will help Jack in the Box. After all, McDonald’s spinoff of Chipotle was part of an era in which it sold the secondary concepts, like Boston Market, that it had collected. The chain’s focus on its core brand has been frequently cited as a catalyst that helped the chain surge between 2002 and 2012.

Similarly, Wendy’s current run of strength came after its 2011 sale of Arby’s for $130 million in cash to focus on its burger chain.

Jack in the Box is hoping for similar results.

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