Is Jack In The Box Considering Qdoba Sale To Apollo Global?

Per a recent report by Reuters, Jack in the Box Inc. (NASDAQ:JACK) is mulling over the sale of its Qdoba Mexican Grill brand to a private equity firm, Apollo Global Management, LLC (NYSE:APO) .

The firm has reportedly offered more than $300 million for the restaurant chain.

Why Qdoba?

Qdoba is the one of the leading fast-casual Mexican brands in the United States. Ever since its acquisition in 2003 for $45 million, the brand has been helping Jack in the Box enhance core growth and balance the risks associated with the highly competitive hamburger segment of the QSR industry. It has also enhanced the company’s geographic presence and drove the top line.

However, poor restaurant level execution and a choppy sales environment have been denting sales at the Qdoba brand of late. In fact, in the first nine months of fiscal 2017, comps at the company-owned Qdoba restaurants declined 2.7% as against a 1.8% increase in the first nine months of 2016. System-wide comps at the brand also declined 1.2% in the same time frame as compared with a 1.6% increase in the year-ago level.

Moreover, the company’s valuation was negatively impacted for sometime as it had to simultaneously run two business models for Jack in the Box quick-service restaurants and Qdoba Mexican Grill fast-casual restaurants.

Given this scenario, management has been considering alternatives for the Qdoba brand and has retained Morgan Stanley (NYSE:MS) for the same.

Bottom Line

Notably, an activist hedge fund Jana Partners recently took over a $1.3-million stake in Jack in the Box. Filings also revealed that Jeff Smith’s Starboard Value invested in the company in the last quarter. Meanwhile, the restaurant space has seen the signing of quite a few deals in the recent months owing to a choppy sales environment and stiff competition. The activist hedge funds therefore, by buying stakes in the restaurants, compel them to turn around their business operations.

In fact, shortly after Jana Partners had urged Whole Foods Market (NASDAQ:WFM), Inc. to consider a sell-off, the company was taken over by Amazon.com, Inc. (NASDAQ:AMZN) . Hence this hedge fund is likely to encourage Jack in the Box toward a change.

Meanwhile, Jack in the Box’s shares have widely underperformed its industry on a year-to-date basis. The stock has lost 9.2% as against the industry’s gain of 11.1%. Estimates for the current quarter and year have also moved down 2.2% and 0.2%, respectively, raising doubts over the stock’s upside potential.

Notably, the deal might get finalized next week. It is to be seen how the merger, on completion, works for this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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