This is not Bill Ackman’s first “restaurant chain” rodeo. The activist investor head of Pershing Square Capital Management LP just took a 9.9% stake in Chipotle Mexican Grill Inc. (NYSE:CMGB) and his battle plan sounds familiar.
Ackman, who describes Chipotle as a strong brand with a differentiated offering, growth opportunity and visionary leadership also says the stock is undervalued and a good investment.
Been There Done That
If past is any prelude, Ackman’s history of activist involvement in the restaurant industry could mean some big changes may be coming suggested, and in some cases implemented at Chipotle.
Ackman had more success with Burger King (now a subsidiary of Restaurant Brands International), which he helped return to the stock market in 2012. Other activist involvement including originally fighting – then backing away from – Tilman Fertitta’s buyout of Landry’s Restaurants Inc. once stock prices became acceptable.
The Ackman Philosophy
Ackman has described his philosophy as one of identifying great businesses that trade at highly discounted valuations. In most cases this is because investors have overreacted to company-specific, non-long term events, according to Ackman. In the case of Chipotle, the “events” could be stock price plunges tied to food safety issues.
After investing, Ackman prefers to use Pershing’s stake as leverage to intervene in decision-making, strategy, management and the overall structure of the business.
Ackman believes Pershing’s track record of making money for investors empowers it to be able to be involved without the need to gain full control of the target company.
As far as Chipotle Mexican Grill is concerned, Ackman indicated Pershing would hold discussions with Chipotle management and its board.
The hedge fund said it plans to hold discussions with the management and the board on governance, board composition, cost structure, management and strategic plans.
Pershing’s 9.9% stake would make it the second-largest investor in Chipotle, according to Bloomberg.
Action So Far
Over the past 12 months Chipotle shares have dropped 42%. However, on news of Pershing and Ackman’s investment, the stock jumped 4.8% after hours Tuesday to $434.
As of midmorning Wednesday shares were trading at around $437, up nearly 6% on the day so far.
Making Up For Lost Ground
The move with Chipotle may be an attempt by Ackman to recover from what has been a bad year for the hedge fund manager.
Misses have included Herbalife Ltd. (NYSE:HLFB), Valeant Pharmaceuticals International Inc. (NYSE:VRXB) and Platform Specialty Products, Inc. (NYSE:PAHB). Herbalife, which Ackman famously bet big against, is up. The others are down.
With Chipotle Ackman, perhaps, hopes to rebuild by doing what he does best – identifying strong companies that need some operations cleanup, cutting costs and restructuring management.