Ackman Sets Sights on Beleaguered Chipotle and Insular Board

Why Bill Ackman Bought a Stake in Chipotle
  • Investor takes $1.2 billion stake in Mexican-food chain
  • Chipotle has struggled to recover from E. coli outbreak

Billionaire activist Bill Ackman is taking aim at Chipotle Mexican Grill Inc., wagering roughly $1.2 billion that he can help fix a beleaguered restaurant chain that has drawn flak for its insular board.

Pershing Square Holdings Ltd., Ackman’s hedge fund, announced a 9.9 percent stake in Chipotle on Tuesday, saying it will discuss ways to revamp the company’s governance, operations, cost structure and strategy. The move could reignite efforts to shake up Chipotle’s nine-person board, which has been criticized for its slow response to a food-safety crisis and a lack of diverse viewpoints.

Chipotle is now in the cross hairs of a high-profile activist with a history of tangling with CEOs and directors. Ackman, who serves as Pershing Square’s chief executive officer, is looking to Chipotle to help him bounce back from his own challenging year. He’s been stung by an investment in Valeant Pharmaceuticals International Inc. and -- so far -- failed to profit from a $1 billion bet against Herbalife Ltd., which he alleges is a pyramid scheme.

Chipotle, meanwhile, is still struggling to recover from a series of foodborne illnesses that began in the second half of 2015. The Denver-based company has attempted to revive sales with a new marketing campaign, along with a rewards program, though a comeback has been slow to materialize. Adding to its woes, one of the company’s top four executives was recently indicted on charges that he bought cocaine from a New York drug ring.

Franchising Push?

Part of Ackman’s plan may be to push the chain to sell locations to franchisees, according to Stephen Anderson, an analyst at Maxim Group. But it’s hard to tell if that idea would go over well with co-CEO Steve Ells, who founded the company and runs it with a small cadre of top managers.

“I’m not sure he’ll get anywhere with Steve Ells with that,” said Anderson, who has a sell rating on the stock. “If you’re looking at ways to unleash value, that might have some potential.”

A spokesman for Pershing Square declined to comment beyond Tuesday’s regulatory filing disclosing the stake. In that statement, the firm described Chipotle as an undervalued company with a “strong brand, differentiated offering, enormous growth opportunity and visionary leadership.”

Chipotle pointed to that praise in its own statement responding to the filing.

“We just learned today of Pershing Square’s acquisition of Chipotle shares,” spokesman Chris Arnold said. “We welcome their investment and appreciate the confidence they’ve expressed.”

The announcement that Pershing Square acquired a stake totaling 2.9 million shares -- including 554,000 common shares and 2.3 million shares under purchase contracts -- sent Chipotle up as much as 6.4 percent to $440.43 on Wednesday. That marked the biggest gain since January. The stock had been down 14 percent this year through Tuesday’s close, hurt by the fallout from the E. coli outbreak.

Board Scrutiny

Ackman’s involvement could intensify scrutiny of Chipotle’s directors. CtW Investment Group, a firm affiliated with the union-backed group Change to Win, lobbied unsuccessfully to remove Patrick Flynn and Darlene Friedman from the board earlier this year. Investors voted to keep the directors at Chipotle’s annual meeting in May, but they did pass a proxy-access measure that may make it easier to submit future proposals.

Ackman could use a proxy fight to challenge the board -- a tactic that has worked at restaurant companies in the past. Starboard Value unseated all of the directors of Olive Garden owner Darden Restaurants Inc. after a proxy fight in 2014.

A stake of nearly 10 percent would make Pershing Square the second-largest investor in Chipotle, according to data compiled by Bloomberg. The firm’s disclosure on Tuesday came less than an hour after Canadian Pacific Railway Ltd. said that Ackman had stepped down from its board, where the activist billionaire led a successful proxy fight to oust then-CEO Fred Green after years of poor performance. Pershing Square sold out of its 6.7 percent Canadian Pacific in August, banking about C$1.89 billion ($1.5 billion), which it said at the time would be used for one or more new investments.

Icahn Fight

Ackman, 50, also spent the summer continuing his war of words with fellow billionaire Carl Icahn over Herbalife. In the latest tussle between the outspoken investors, Ackman claimed Icahn was looking to sell his holdings in Herbalife following a settlement with federal regulators in July. Instead, Icahn raised his stake to more than 21 percent, up from 18 percent.

In March, the Ackman joined the board of the drugmaker Valeant as CEO Mike Pearson stepped down. The Laval, Quebec-based company’s shares are down more than 70 percent this year after a relatively minor accounting problem snowballed into a massive crisis.

Pershing Square, one of Valeant’s biggest investors, has seen its net asset value fall to $17.97 as of August 13, down from $20.96 at the end of last year. That’s a drop of more than 14 percent. The investment firm also cut its stake in Mondelez International Inc. this year.

CDC Investigation

Chipotle’s food-safety crisis erupted in November, when the Centers for Disease Control and Prevention said it was investigating an E. coli outbreak tied to the chain. That brought attention to previous foodborne illnesses among Chipotle customers. The situation worsened when a norovirus outbreak struck a location outside Boston College in December, hammering the company’s results and stock price.

Chipotle’s same-store sales have dropped for three straight quarters, including a 23.6 percent decrease in the most recently reported period. The company got more bad news this summer when Mark Crumpacker was indicted for allegedly purchasing cocaine. The executive, who was overseeing the advertising push meant to spur a recovery, was placed on leave by the company. He had run marketing since 2009.

Director Search

Chipotle, already facing investor scrutiny, said last month it was interviewing for a new board member. The company has been criticized for having all-white, mostly male directors. The board also has had a median tenure of 17 years, CtW complained earlier this year. Ells, who has been chairman since 2005, serves as co-CEO with Monty Moran.

In July, Chipotle reiterated plans to open as many as 235 new restaurants in 2016. It also is making a foray into burgers. The company expects to start a new chain under the Tasty Made name, with the first location scheduled to open in Lancaster, Ohio, this fall.

Ackman may have concerns about that rapid expansion, especially as Chipotle’s recovery drags on.

He may want to “slow down unit development and keep a more permanent focus on shareholder returns, with an eye toward a potential dividend,” Anderson said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE