RUNNING HEAD: IPO Paper

IPO Paper - Chipotle Mexican Grill

Advanced Managerial Finance– FI_516 – Fall_B

Keller Graduate School of Management of DeVry University

February 6, 2012
IPO Paper – Chipotle Mexican Grill

Chipotle Mexican Grill, Inc. (Chipotle) is a chain of restaurants in the United States, Canada, and today around the world specializing in burritos and tacos, founded by Steve Ells in 1993 and based in Denver, Colorado. The name derives from "chipotle", the Mexican Spanish name for a smoked, dried jalapeño chili pepper.
The restaurant is known for its large burritos, assembly line production and use of natural ingredients. The company has released a mission statement called “Food with Integrity”, which highlights its efforts in using organic ingredients, and serves more naturally raised meat than any other restaurant. Chipotle is one of the first chains of fast casual dining establishments. From 1998 to 2006, McDonald's Corporation owned a majority interest in Chipotle, from which it fully divested in 2006.
The company currently has more than 1100 locations, with restaurants in 41 states, Washington, D.C., Toronto, Ontario, and London, England. Its net income in 2010 was $178 million, and it has a staff of over 26,500 employees.
Overall revenue for Chipotle in 2004 was $470.7 million, a 130% increase from 2002 and a 49% increase from 2003, this was driven by new store openings and increased average sales. Average store sales grew from $1,056,000 for 2002 to $1,274,000 for 2003, $1,361,000 for 2004 and $1,406,000 for the trailing 12-month period ended September 30, 2005, reflecting the growing consumer awareness of the brand. Strong growth in sales at stores open at least 13 full months, which were called comp store sales, was due mainly to an increase in the number of transactions processed at their store registers. Their net income (loss) improved from a loss of $(7.7) million in 2003 to income of $6.1 million in 2004 and $33.4 million (inclusive of a non-recurring $20.3 million tax benefit) in the nine months of 2005, and their earnings before interest, taxes, depreciation and amortization, or EBITDA, was $7.2 million in 2003, $27.9 million in 2004 and $43.7 million in the first nine months of 2005.
Looking though and reviewing the Chipotle IPO offering documentation and the company filing with the SEC in 2005, both them, and the selling shareholder were selling shares of class A common stock, which will have fewer votes per share than their class B common stock. Under the terms of their amended certificate of incorporation, one of the features of the class B common stock is that any holder of shares of class B common stock, including the selling shareholder, will have the right to convert those shares to shares of class A common stock at any time prior to a tax-free distribution of such shares to McDonald's shareholders (including a distribution in exchange for McDonald's shares or securities).
In addition, prior to any such distribution, under the amended certificate of incorporation, shares of class B common stock can only be transferred to McDonald's or its subsidiaries, and any other transfer of such shares will result in the automatic conversion of those shares to shares of class A common stock without action by the transferor or transferee. Thus, although all of the shares that the selling shareholder will receive in connection with the reclassification will be shares of class B common stock, any shares that investors will receive from the selling shareholder in the offering will be shares of class A common stock. After completing the IPO offering, McDonald's beneficially will then own common stock representing 88% of the combined voting power of their outstanding stock and 69% of the economic interest in their outstanding common stock (or 87% and 65%, respectively).
On opening day of the IPO, McDonald's spinoff “Chipotle Mexican Grill Inc.” rolled into the history books as its initial public offering rose 100% to become the biggest opening-day gainer in a U.S.-based deal in more than the last five years. On the first day of trading their stock ended at $44 a share, up exactly twice from its original $22 price.
Chipotle raised $173 million by offering 7.88 million shares priced above its $18-to-$20 price range. Chipotle used the proceeds from the offering to pay down a $30 million line of credit it had from McDonald's and to shore up its own long-term capital. Chipotle sold 6.06 million shares in the IPO, and McDonald's sold 1.82 million.
Investors lined up for the offering based partially on optimism over the growth of the fast-casual segment, now totaling $7 billion and considered the fastest-growing category in the restaurant industry, with a projected five-year compound annual growth rate of at least 11%.
After the issue of the Chipotle IPO, McDonald's itself had invested approximately $360 million into Chipotle, and took out $1.5 billion. The company currently trades on the New York Stock Exchange. Competitors in the fast-casual Mexican market include Qdoba Mexican Grill, Moe's Southwest Grill, Rubio's Fresh Mexican Grill, Panchero's Mexican Grill, and Baja Fresh. In a list of fastest-growing restaurant chains in 2009, Chipotle was ranked eighth, based on increases in U.S. sales over the past year, and in 2010 Chipotle was ranked third. Consumer Reports ranked Chipotle as the best Mexican fast-food chain in 2011. The company has approximately 750,000 customers per day.
The overall trend for Chipotle, shareholders, and their stock prices has been nothing short of a very successful run of increased company growth, stock prices, and company value. Included below is a chart and break down of the past six years of stock prices, and a great outlook for the overall continued success for the Chipotle Mexican Grill, and chain of restaurants.
Chipotle Mexican Grill – “Yearly Stock Prices” -------------------------------------------------
Top of FormBottom of Form | | | | | | | Date | Open | High | Low | Close | Volume | Change (%) | 1/31/2012 | $369.00 | $369.72 | $365.52 | $367.29 | 3499 | 8.75% | 12/30/2011 | $341.20 | $341.81 | $337.74 | $337.74 | 2231 | 58.82% | 12/31/2010 | $214.71 | $217.91 | $212.58 | $212.66 | 6533 | 141.22% | 12/31/2009 | $90.19 | $90.34 | $87.92 | $88.16 | 3132 | 42.24% | 12/31/2008 | $62.00 | $63.24 | $61.05 | $61.98 | 4429 | -57.86% | 12/31/2007 | $151.96 | $155.49 | $146.43 | $147.07 | 4991 | 158.02% | 12/29/2006 | $56.23 | $57.00 | $55.98 | $57.00 | 5219 | 0% Bottom of Form |

References

ContraHour. (2006). Seeking Alpha. The Chipotle IPO: An Indepth Overview. Retrieved from: http://seekingalpha.com/article/6412-the-chipotle-ipo-an-indepth-overview
Ehrhardt, Michael, C., Brigham, Eugene F. (2009). Financial management. theory and practice. Mason, OH. ; South-Western Cengage Learning.
STOCK NOD. (2012). STOCKNOD. Chipotle Mexican Grill Stock Prices. Retrieved from: http://www.stocknod.com/CMG-stock-prices.aspx