Is A Takeover The Solution To Chipotle’s Woes ?

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Chipotle Mexican Grill's ( CMG ) food safety nightmare continues and the company was recently impacted by another incident in Los Angeles .  While these food safety related incidents are isolated and limited to just one restaurant, for a company struggling to re-establish itself after a serious E. coli virus outbreak in 2015, the impact of these food-virus related reports is significant. (Read Chipotle's Nightmare With Negative Publicity Continues ).  Chipotle is also struggling to build a strong leadership team and is currently on the look-out for a new CEO. (Read Can A New CEO Turn Chipotle Around? ) With a prolonged "crisis-like" situation, a fresh management team is crucial for Chipotle's revival - which can be ensured by an acquisition. Further, with its current stock price more than 50% lower than September 2015 levels (before the E. coli virus hit the company), this may make Chipotle an attractive target.

Strong competition and rising costs have led to a consolidation in the restaurant industry over the past two years. Several recent transactions such as the acquisition of Panera Bread by JAB Holdings and  Buffalo Wild Wings by Arby's,  indicate that the consolidation trend in the fast casual restaurant segment is likely to continue.  Several analysts have indicated that Chipotle is a ripe target for a takeover, however with its fragile reputation acquirers/investors are likely to be wary to carry out a transaction. Chipotle can benefit from an acquisition significantly as follows:

  • Stronger Execution Via An Established Management Team: Chipotle's management has struggled to manage the food virus crisis and even two years later it has been unable to restore customer confidence. This can be attributed to a lack of strong execution at the restaurant level and the company's inability to manage the universe of 2,200 restaurants. It does not seem to have processes in place to manage a higher number of restaurants which handle fresh ingredients, leading to sporadic isolated food virus incidents. An experienced management team which already runs a restaurant chain might prove to be an asset to resolve this issue.
  • Sustained Long Term Growth  : While Chipotle's concept of "Food With Integrity" and focus on preservative free natural ingredients attracted customers, the company was unable to scale up this concept. Plagued by issues, the company has reduced its expansion target for 2018, indicating that it needs to establish a strong process in place for existing restaurants before a large scale expansion can occur. However, an acquisition by an existing restaurant chain can ensure a faster expansion as Chipotle benefits from existing best practices.

While the above factors would work in Chipotle's favor, it is uncertain if an acquirer would be able to further Chipotle's concept of fresh ingredients and focus on natural products. Chipotle's expansion is challenging since the focus on fresh ingredients requires a strong supply chain management.

We believe acquisition by a strong player can benefit Chipotle significantly and drive growth and profitability.

Click here to see our complete analysis of Chipotle Mexican Grill.

Our  price estimate of Chipotle Mexican Grill is $284 which is around 10% lower than its current price.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks , US Markets , Investing Ideas
Referenced Symbols: CMG , MCD , DNKN , QSR

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