McDonald’s Should Buy Back Chipotle, Which It Spun Out in 2006

Chipotle Mexican Grill Inc. (NYSE: CMG), which has taken a beating unprecedented in the recent history of fast-food chains, was spun out by McDonald’s Corp. (NYSE: MCD) in 2006. The Mexican food chain has suffered from a tainted food scandal and has been abandoned by consumers. The huge hamburger chain has the chance to buy it back at a steep discount to its share price a year ago. McDonald’s went through its own successful turnaround recently, and it has the opportunity to do it again with Chipotle.

Chipotle shares rose 100% on the day of its IPO — January 26, 2006 — to $44. McDonald’s made the choice to rid itself of a business that had a menu completely unlike its own. Chipotle’s stock has dropped 42% this year to $415. Of course, the company has revenue well beyond what it did in 2006. Its revenue in 2006 was $823 million. In 2015, the figure jumped to $4.5 billion.

Chipotle same-store sales fell 23% in the most recent quarter. Its revenue nosedived 17% to $998 million. And there is no sign of an improvement soon.

McDonald’s successful resurrection has built its market cap to $112 billion, compared to Chipotle’s $12 billion market cap. It would not be difficult for the larger company to swallow the smaller one.

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In a buyout, McDonald’s would have to gamble on two things for success. The first and more risky one is that some portion of Chipotle’s customers will return. It has tried to lure them with promotions and a reset of its image. Obviously, that has not worked — so far. The other and more likely course for McDonald’s to turnaround Chipotle is to overhaul its menu and its hours, which the hamburger chain did for itself almost two years ago.

No rule says that Chipotle cannot recast itself as something more than a Mexican food chain. There is no reason it cannot do what McDonald’s did, which, among other things, was to change its own store hours and when its popular menu of breakfast meals was available. It took several years for McDonald’s to make its comeback. A sharp improvement for Chipotle may take just as long. McDonald’s has the balance sheet and revenue to be patient.

A McDonald’s bet on Chipotle would be founded on the chance that the smaller company will not be terribly damaged forever. McDonald’s already has written the book showing that does not have to be the case.

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