Thursday’s trading session brought plenty of excitement to the US restaurant sector. According to the *Financial Times*, Starbucks (SBUX.O) has reportedly been working with advisers in recent months on a proposed takeover of Chipotle Mexican Grill (CMG.N). The report, citing sources close to the matter, immediately sent the shares of both companies in opposite directions on the trading floor.
The market reaction is textbook for an M&A deal. Shares in the potential target, Chipotle, rose by as much as 8.5 per cent (to US$33.40), before stabilising at around +5.9 per cent, with trading volumes significantly higher at over 27 million shares. This is the typical premium that investors expect in the event of a takeover. Meanwhile, Starbucks’ share price – the acquiring company – fell by as much as 6.7 per cent at its lowest point (to $87.35), eventually hovering around -3.5 per cent. A fall in the acquiring company’s share price is also a classic pattern: the market is concerned about transaction costs, potential debt and integration risks.
Behind the whole story stands Brian Niccol, the current CEO of Starbucks, who built his reputation at Chipotle. Such a move would signify a return to the roots and the merging of two well-known brands under one roof. It is worth noting, however, the contrast in the performance of the two companies. Niccol is leading a turnaround at Starbucks; the simplification of the menu and the reduction in waiting times have resulted in four consecutive quarters of like-for-like sales growth, and the share price has risen by around 10 per cent since the start of the year. Chipotle, on the other hand, is in the opposite situation, facing weakening consumer demand and rising raw material costs against a backdrop of persistent inflation, with its shares down by around 12 per cent year-to-date.
From a fundamental perspective, the scale of the potential deal is impressive. Starbucks’ market capitalisation stands at around US$107 billion, whilst Chipotle is valued at nearly US$39 billion. An acquisition of this magnitude would be one of the largest in the industry’s history and would require significant financing, which explains investors’ caution regarding the buyer.
Key caveat: at this stage, these are merely media reports. Neither Starbucks nor Chipotle have commented on the matter, and the FT itself points out that the status of the takeover plans is far from certain. For investors, this means increased volatility and a significant element of speculation, as the market is currently pricing in a scenario that may never materialise. It is worth keeping an eye on official announcements from both companies, as these will determine whether the current price movements prove to be sustainable. Source: XTB
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