Breakingviews: Ackman's Chipotle recipe outdated

Published Thu, Sep 8 201612:00 AM EDT

Breakingviews

Kevin Allison

Bill Ackman may be reaching deep into the activist investor cookbook to find a recipe to revive Chipotle . The pushy hedge-fund manager's firm Pershing Square reported a 10 percent stake in the struggling burrito chain on Tuesday. He is no stranger to the fast-food business, but there are few obvious parallels to his previous investments in Burger King , McDonald 's or Wendy's . Over a decade ago, Ackman unsuccessfully pushed for a breakup of the Golden Arches, arguing that spinning off company-owned restaurants would boost margins and unlock hidden value. McDonald's demurred but its stock price nearly doubled during the time he was involved. A year later, in 2006, he had better luck at Wendy's, which jettisoned Canadian coffee and donut chain Tim Hortons – netting another big payday. A few years ago, he brokered a $1.4 billion deal to return the Home of the Whopper to the public market using a special-purpose vehicle alongside Brazilian buyout firm 3G. Ackman came full circle when Burger King later bought Tim Hortons for $11 billion. More from Breakingviews : A $1 trln un-merger record that's hard to beat Ackman plans to speak to management, but whatever ideas he has for Chipotle remain under wraps. The company's shares have tumbled by more than 40 percent since last August after a series of food-contamination incidents. Unlike McDonald's, which had some 8,000 company-owned stores when he showed up, the Denver-based Tex-Mex chain leases all but a handful of its restaurants. There's no obvious breakup as there was at Wendy's. Fast-growing Chipotle doesn't neatly fit the 3G model of cutting fat and improving operational performance as at Burger King. A sale at its existing valuation of 60 times expected earnings also would be a big stretch. Chipotle's balance sheet is clean, however. Ackman could urge the company to borrow some money and buy back shares, but it's not the typical strategy of a value-style investor. He may want Chipotle to embrace franchising, a business model that the likes of McDonald's have used in the past to improve profitability and growth. With its reputation reeling, however, that may be a tough sell. The company's damaged brand is its biggest problem, and competitors are starting to take advantage. That's something no amount of creative finance can fix. For more independent commentary and analysis from Reuters Breakingviews, visit breakingviews.com .

Chipotle restaurant workers in Miami

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