McDonald's and Chipotle end partnership after 8 years

0 Comments | Deseret News (Salt Lake City), Oct 16, 2006 | by Sandy Shore Associated Press

DENVER -- After an eight-year partnership, the Big Mac and the burrito have said a final goodbye.

McDonald's Corp., the world's largest fast-food company, has divested its stake in Chipotle Mexican Grill Inc. after allowing shareholders to exchange 16.5 million Chipotle Class B shares for 18.6 million of McDonald's own common shares.

The move, completed Friday, helps McDonald's focus on its core brands while casual restaurant chain Chipotle gains more flexibility for growth. Other than the ownership change, it will be a stay-the- course mode for Chipotle.

"There really isn't going to be any sort of big change in the way we run the business," Chipotle founder and Chief Executive Officer Steve Ells said Friday. "Very, very much the same."

Analysts have applauded the move and have forecast sustainable growth for Chipotle over the long term.

"It's just a great company. Nothing there has changed," RBC Capital Markets analyst Lawrence Miller said. "Their biggest challenge is just maintaining the integrity of the brand."

J.P. Morgan analyst Steven Rees upgraded Chipotle shares from neutral to overweight this week and estimated a 25 percent to 30 percent growth in earnings over the long term.

"Continued unit growth is supported by solid new-unit volume performance, success with smaller format restaurants and very high customer demand," he wrote in a research note published Monday.

Founded in Denver in 1993, Chipotle (pronounced chi-POAT-lay) made its name by selling meal-sized burritos, tacos and salads. McDonald's purchased a stake in 1998 when Chipotle had 14 Denver- area restaurants, helping finance Chipotle's growth and allowing the company to leverage some of McDonald's resources.

McDonald's, based in Oak Brook, Ill., spun off a minority stake in Chipotle in January so it could expand and create more shareholder value and then decided to divest the rest of its stake through the stock swap. The 16.5 million Chipotle shares that were exchanged represented about 82.2 percent of the voting interest and 50.8 percent of the economic stake in Chipotle as of June 30.

Chipotle has grown to more than 500 restaurants in 23 states and the District of Columbia, and the company estimates same-store sales growth will be in the low double digits for 2006. Its revenue climbed 31 percent in the second quarter.

Ells said they will continue to develop and expand sources for its natural products and plan to add as many as 90 restaurants this year and a few more than that in 2007 in mostly existing markets.