McDonald's Corp. (NYSE: MCD
) plans to sell its ownership of Chipotle Mexican Grill (NYSE: CMG
), completely separating its 87% stake by year-end to concentrate its focus on its name brand. The move could temporarily slow down growth of the fast-growing Mexican fast-food chain.
Subject to market conditions, McDonald's plans to sell about 5 million shares of Chipotle stock through a registered securities offering within the next two months and use the proceeds to buy back McDonald's shares. In addition, McDonald's expects to completely separate from Chipotle later this year through a tax-free exchange of Chipotle shares for McDonald's common stock, again subject to market conditions.
Chipotle Mexican Grill completed its initial public offering of common stock in January 2006.
"Since we made our initial investment in 1998, Chipotle has grown from 16 restaurants in the Denver area to a strong and popular restaurant concept with more than 500 locations throughout the U.S. We are extremely proud to be a part of this genuine business success story," said Jim Skinner, CEO of McDonald's.
"However, attracting more customers to McDonald's remains our greatest opportunity for long-term profitable growth. Just 1% growth in McDonald's global comparable sales translates to approximately $100 million in additional operating profit for the company and a substantial cash flow increase for all of our McDonald's owner/operators," Skinner said. "We believe that now is the time to further sharpen our focus on brand McDonald's."
Though, Steve Ells, founder, chairman and CEO of Chipotle, said of McDonald's disinvestment plan, "We've always operated independently and that won't change as McDonald's continues to reduce its investment," Chipotle hasn't truly been independent. It has relied on McDonald's for a menu of corporate services.
Up until last year, Chipotle used McDonald's real estate personnel to open new stores. When it switched to its own resources in 2005, Chipotle's new restaurant openings lost speed. In 2004, when it did rely on McDonald's for store expansion, it opened 104 stores. That slowed to 80 in 2005.
For this year, Chipotle has announced plans to open 80 to 90 restaurants. There were 500 Chipotle stores as of March 10.
Chipotle's average free-standing store seats about 100 customers, while its average in-line or end-cap store seats about 65 customers. Its average store size is about 2,700 square feet. Most of its eateries also feature outdoor patio space.
Aside from McDonald's real estate resources, Chipotle has also relied on McDonald's for legal, insurance and benefits service, and most importantly on its accounting services. The accounting services included all software systems for such things as new store setups, lease and rents, invoicing, accounts payable, cash receipts, taxes and financial reporting.
Those services terminate once McDonald's share of ownership falls to less than 80% of Chipotle.
In its first annual report to shareholders last month, Chipotle stated, that, "as we begin to increase our independence from McDonald's, we may have to seek new suppliers and service providers or enter into new arrangements with our existing ones, and we may encounter difficulties or be unable to negotiate pricing or other terms as favorable as those we currently enjoy, which could harm our business and operating results. However, because we currently have not begun to negotiate new or amended contracts with suppliers and service providers, we cannot now quantify with any certainty potential increases in our expenses."
One of Chipotle's favorable pricing arrangements has been contingent on McDonald's relationship with Coca-Cola, an advantage Chipotle may no longer share once it is no longer a consolidated subsidiary of McDonald's.
Chipotle has also relied on the McDonald's food distribution network. As it begins to cut its ties to McDonald's, Chipotle could have to seek new suppliers and service providers.
Changes in all such relationships could impact new store openings and existing store operations.