Chipotle Mexican Grill, Inc. (NYSE:CMG) did not literally put the “for sale” sign out when they abruptly promoted founder Steve Ells out of his CEO position and began a search for a successor. But investors took it as meaning just that, bidding the stock up by $25 per share between the morning of Nov. 28 and the opening of trade on Nov. 29.
The press release on the move stated that Ells would be part of a three-man committee to choose a successor, making it appear to be a promotion. But Ells is just 51. Basically, he fired himself, or was told to do so by his board of directors.
Cash Flow is King for CMG Stock
One thing seems clear. Roark Capital Group is unlikely to be in on the Chipotle bidding.
Even after falling 30% in the last year, and 60% from its all-time high of nearly $750 per share achieved in 2015, Chipotle has a market cap of $8 billion. That’s too big for Roark, with its $6 billion in capital, to contemplate, unless it is to do a major raise.
It might not be too big for JAB Holding Co., which paid $7.5 billion for Panera Bread earlier this year. It also might not be too big for 3G Capital, whose Restaurant Brands International Inc. (NYSE:QSR) paid $12.4 billion for Tim Horton’s in 2014, combined it with Burger King, added Popeye’s for $1.8 billion, and now sports a market cap of nearly $40 billion, up 32% so far in 2017.
Less likely buyers include McDonald’s Corporation (NYSE:MCD), which fully divested from Chipotle in 2006. It could easily afford to buy the chain, with a market cap of $139 billion, but the fact that it’s a chain doesn’t fit with McDonald’s strategy of having franchised stores.
Why would anyone be interested? As my story on Roark and Buffalo Wild Wings made clear, it’s all about the cash flow. Stung by repeated scandals and missteps, Chipotle’s cash flow fell sharply in 2016, but in 2015 operating cash flow was $683 million, and it had already topped 2016’s $350 million in its first three quarters of 2017.
But stock buyer beware. The sharks circling Chipotle are savvy. They may not give you the premium you seek.
The Buffalo Wild Wings transaction, for instance, came in at 10 times EBITDA, and it fetched just $2.9 billion despite having superior cash flow to Chipotle.
Whoever buys Chipotle also faces a turnaround situation.
Ells’ recent moves, like the “queso” topping, have been laughed at, its cost of goods keeps rising, and many were just starting to forget its 2015 E. coli outbreak when an outbreak of novovirus hit diners this summer. Then, this month, actor Jeremy Jordan said he “almost died” after eating at one of the chain’s outlets. Fresh food isn’t cheap food.
Then there is Pershing Square, which acquired about 10% of the company over the summer and put its own directors on the board. The shares are down about 10% since Ackman’s move was announced. He won’t want to take a loss.
I speculated, without evidence, that activist investor Marcato Capital Management LP may be keeping money in Roark Capital after the Buffalo Wild Wings deal, because otherwise they show very little gain for a lot of effort. Maybe Ackman can keep his money with whoever buys Chipotle.
But with the overnight run-up in the stock price, Chipotle seems fully priced. The potential buyers are smart, and aren’t going to throw money around. Playing arbitrage rumors is always a risky game for the small investor. The risks are heightened here.
Dana Blankenhorn http://www.danablankenhorn.com is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this story.