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How Del Taco and 11 more FT Dealmakers Landed Suitors

Behold the Epic Burrito, a hefty tortilla stuffed with beans cooked from scratch for three hours each day and cheddar cheese shredded in-house from a 40-pound block and displayed front and center at every Del Taco for about five bucks.

It's the embodiment of Del Taco's effort to thread the needle between quick-service and fast-casual, to beat Taco Bell on price and yet rival Chipotle on food quality (and let's stipulate, this is setting aside Chipotle's recent food safety stumbles.)

That strategy, to become "QSR-Plus" as analysts and Del Taco's CEO Paul Murphy himself have started to say, was developed after intense research starting in 2011, when Murphy and his team realized the 50-year-old brand just wasn't cutting it with millennials. They had full kitchens in every restaurant and cooked food the old-fashioned way, but they weren't telling customers about it so they got zero credit.

So they researched McDonald's and Chick-fil-A and Jack in the Box, interviewing former executives and poring over public documents to see what those brands did to reinvent.

"The companies we thought were successful didn't do one thing," Murphy says. "They really signaled change in everything that touches the customer." The eventual strategy, called "combined solutions," was good enough to convince their long-suffering owners, led by private equity firm Goldman Sachs, to recapitalize the brand in 2013 (that means put in more money); they would ultimately hold Del Taco for 10 long years, and Murphy gives them credit. "They were willing to give us the time and money to execute the strategy," he says.

It was also enough to attract the attention of Larry Levy, the Chicago restaurant tycoon who spent several months visiting Del Taco restaurants and putting together investors, ultimately winning the 550-unit Del Taco last June via a SPAC. That stands for special purchase acquisition company, which is a little-used vehicle these days. "You see the SPACs are targeting businesses that are built out, not purely speculative" like in the past, Murphy says. "It was a perfect match."

The deal came in two steps. First, the Levy family and investors bought $120 million of Del Taco common stock, 46 percent of the company, and increased senior debt by $35.1 million under the existing credit agreement with GE Capital. Those proceeds were used to retire $111 million in senior debt. In step two, a Levy Acquisition subsidiary merged into Del Taco, taking the company public for a $500 million valuation.

"They knew we were in the early stages of a repositioning, and the growth potential was there," Murphy says about his new bosses. "They bought into the QSR-Plus strategy that we had undertaken."

Larry Levy is the new chairman; he co-founded Levy Restaurants in 1978 and grew it from a single Chicago deli into an international foodservice company with more than $1 billion in annual revenue. He sold Levy Restaurants in two stages, in 2000 and 2006, and founded Levy Family Partners in 2003, a family investment business run alongside two of his sons, Ari Levy and Steve Florsheim. Since starting, Levy Family Partners has made more than 200 investments, more than half in the restaurant, hotel, resort and real estate industries, with Blaze Pizza and Pollo Campero two of the notable brands.

Other well-known restaurant executives have joined the board, which for Murphy is the best part of the deal. "They allow us to talk about issues with the board beyond financial."

They can bring up things that they've seen, that help Del Taco.
'It opens doors that we wouldn't have been able to go through before."

Born to a military family, Murphy is comfortable going through most doors. He went to six different elementary schools, which he says gave him "maybe a little bit of wanderlust. I like to travel. I'm not scared to move." Murphy was a theology major in graduate school in Virginia, aiming to teach comparative theology starting in a private boarding school, then move to the college level.

His father had provided for his undergrad degree, but grad school was "all on me," Murphy says, so he took a job working midnight to 8 a.m. at a deli. The owner eventually asked him to manage it. "He offered me more money than any of the teaching positions" he'd considered, and a restaurant operator was born. "You're as much in the people business as you are in the restaurant business. Every day is different."

He doesn't leave his background on the shelf, though, Murphy talks often about a "moral responsibility" he feels as a CEO. "Sometimes people get so mired in the short term they give up on the goals," he says, when reflecting on running a publicly held company. "It's a balance. There needs to be a connective tissue." Then he laughs," You can tell I'm a theology major."

Del Taco has a large stable of corporate-owned restaurants,300 vs. 250 franchised,and plans call for growing both, spreading out from their West Coast base. Franchisees have been through plenty over 50 years of zigzagging ownership, and Murphy, coming from a stint as CEO of Einstein Noah's, was greeted with skepticism when he joined Del Taco in 2009. "I got a note from a franchisee, "what does a bagel guy know about Mexican food?", he recalls.

"Fair enough," Murphy says today. "The franchisees had a right to be skeptical." But he believes they're now on board, because "we have not yin and yanged on strategy. If I'm a business partner I would want to know the management team is committed and will stay around. And once we set the strategy we stuck with the strategy."

With capital freed up to add stores and sign franchisees, Murphy vows to grow the right way. "I try to do the best thing because I like to sleep well at night. I have a fiduciary duty and I also have a moral duty," he says, repeating a term not every executive uses. "You're impacting lives whether you know it or not. Leadership sometimes gets stuck on the back page of the P&L, and yet the P&L is produced by people."

He is well aware that Del Taco's new owners, its franchisees and the shareholding public will demand profit-and-loss results as well as the more lofty kind. Murphy is ready to go.

"We still believe we're early in the journey," he says, "and that's interesting for a 50-year-old brand."
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