09 November 2005

Chipotle Spinoff

I'm reading "You Can Be A Stock Market Genius" by Joel Greenblatt,
based on a recommendation by Blog Hog John Coumarianos. Greenblatt's
first bit of genius certainly isn't his cliches, asides, and
unmemorable anecdotes.

That's the genius of this blog.

His first moneymaking nugget is spinoffs, where a larger company
spins off a subsidiary. He cites a Penn State study that spunoff
companies outperform the S&P 500 by 10% per year for their first three
years, and the parent companies outperform the S&P 500 by 6% per year
for the same period.

Then my stomach growled, interrupting my reading. My thoughts turned to a
carnitas burrito bol with both tomatillo verde salsa. Mmm,
Chipotle, or as we say at the office, "The Chip" or "Chipottal".

See, another bit of bloggy genius: mispronounciation of a foreign word = what passes for wit.

I put a bookmark on page 63, and moved on over to the iBook for some
research on the recently announced spinoff of Chipotle by of all
companies, McDonald's.

Two weeks ago, the Denver Business Journal reported the news that McDonald's filed the Chipotle spinoff with the SEC. McDonald's hopes to raise upwards of $100 million and expand operations. Little else could be gleaned from the filing, other than the new Chipotle ticker, CMG, and this tasty sales morsel:

The Mexican restaurant chain has done well recently, increasing net
earnings for 2005's first half to $28.4 million from $5.5 million for
the same period a year earlier. Chipotle boosted 2004 sales to $430
million, a 34 percent jump from 2003.

I then found this excellent, thorough report from Business Week, touting spinoffs and their parent companies, going so far as to mention the Penn State study cited in Greenblatt's book, as well as analyzing companies spinning off subsidiaries, including McDonald's and WershovenistPig Stock Watch List resident, Cendant. Click the link to read the entire lengthy piece. It's well worth it. But for the blog, let's just look at the excerpt discussing Chipotle:

The fast food giant filed a preliminary statement with the SEC on Oct.
25 to do a partial IPO of its casual restaurant chain Chipotle, in
which McDonald's would retain a majority stake of Chipotle,
distributing the rest to shareholders. "From McDonald's perspective, I
think it's a pretty good idea to spin Chipotle off in order to focus
on the core brand," says Dennis Milton, who follows restaurant stocks
for Standard & Poor's Equity Research.

Okay, that excerpt really didn't do justice to the Business Week piece. Here's the key excerpt:

By spinning off from Sara Lee, S&P thinks that Coach was able to unlock shareholder value. That's generally the reason companies choose to pursue spin-offs. For example, an outfit may separate a fast-growing segment to highlight its value. On Cendant's Oct. 24 investor conference call, CEO Henry Silverman described his reasons for pursuing a spin-off: "We anticipate that the separation of the four businesses will facilitate a clearer understanding and fairer market valuations of these businesses."

Even though McDonald's isn't specifically mentioned here, these comments are all about the McD/Chip deal. McDonald's is a fuddy-duddy Fast Food Nation target. It's known for its french fries and Big Macs, no matter how many McSalad Shakers it advertises in women's glossies. McDonald's is already everywhere.

Chipotle is fresh and growing. It also serves freshly-made food. I think people are surprised when they hear that McDonald's owns it. The Chipotle around the corner from my office has a quick-moving line out the door, a good 40-50 customer long chain, starting at five-after-noon every weekday. This is a textbook situation of McDonald's separating a fast-growing segment to highlight its value.

I eagerly anticipate the CMG IPO. For now, I must settle with a burrito.

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