Chipotle, Ackman Near Settlement
November 18 2016 - 7:40AM
Dow Jones News
Chipotle Mexican Grill Inc. and William Ackman are nearing a
settlement that would give the activist investor a say in the
boardroom at the beleaguered burrito chain.
The Denver company and Mr. Ackman's Pershing Square Capital
Management LP, which disclosed a 9.9% stake two months ago, have
been discussing changing the board and could reach an agreement
soon, according to people familiar with the matter. A deal isn't
assured and could be delayed or fall apart, they said. Both the
company and Mr. Ackman say they've had a cordial relationship.
A settlement could head off a potentially expensive and
distracting public fight over the board, which shareholders,
analysts and governance experts say hasn't properly performed its
role of overseeing and guiding management, especially during a
food-safety crisis that has hobbled the company's sales and
performance for over a year.
Chipotle has said it was already on a path to changing its
nine-member board. Chris Arnold, a spokesman for Chipotle, said on
Thursday the company is "actively looking" for new board directors
and has an "open dialogue" with all the shareholders. He declined
to comment further.
Even before Mr. Ackman's arrival, some investors have questioned
the independence of a board whose members have largely been with
the 23-year-old company from the start and have close ties to the
company's founder, Chairman and Co-Chief Executive Steve Ells. For
instance, some point to a lack of marketing savvy and food-safety
experience contributing to the company's slow response and say the
board is more like a startup than a nearly $12-billion company.
The company's strategy of giving away free food hasn't been
enough to lure back customers scared off by a string of outbreaks,
including salmonella and E. coli outbreaks that sickened customers
in several states a year ago. Chipotle last month said its
same-store sales fell a worse-than-expected 21.9% in the third
quarter. Profit fell 95% and shares of Chipotle are down 31% in the
past year.
"The food-safety crisis really exposed shortcomings in
Chipotle's management and governance," said Jeff Gramm, a small
activist who owns about $8 million in shares.
Four of Chipotle's seven outside directors were appointed to the
board when Chipotle was still privately held. Two worked at former
owner McDonald's Corp. but have been retired for at least 15 years.
Only one other independent member has other restaurant experience.
Shareholders say that the board members' industry experience is too
little and not recent enough.
Two other board members used to work at the same pharmaceutical
company as Mr. Ells's father, who was an early investor in
Chipotle. Five of the directors are at least 60.
Barclays Research said Chipotle's board members have the
second-longest tenure, behind Buffalo Wild Wings Inc., of all the
restaurants it covers. Chipotle's board has an average tenure of 14
years, compared with the industry average of eight and the S&P
500 average of nine. Proxy advisory firm Institutional Shareholder
Services in April criticized the makeup as not in line with
Chipotle's size.
Some investors said a dual-CEO structure slows responses and is
too expensive.
Other governance experts are focused on getting a new chairman.
CtW Investment Group, which represents union pension funds that own
approximately $22 million in Chipotle stock, and Amalgamated Bank,
another investor, are seeking a nonbinding shareholder vote to
separate the chairman and CEO role. They often push such votes.
"If they just add one or two people to this standing group
that's chummy, it will be no panacea to their problems," said
Derrick Wortes, lead equity analyst at CtW.
Joe Dennison of Zevenbergen Capital Investments LLC, which holds
about $40 million in shares, said criticism of the board discounts
strong growth before the outbreaks.
For Mr. Ackman, a settlement would mark an important victory
after two rough years of losses in investments, particularly
Valeant Pharmaceuticals International Inc. Some activist watchers
have questioned if he'd be able to win support amid his
performance.
Some Chipotle investors say he has been more positive in
meetings about Chipotle management than they expected.
He told Pershing Square's investors last week that his
relationship with Chipotle was productive, and that he and Mr. Ells
had mutual friends.
His partners defended Chipotle's response to the crisis on the
conference call, saying "the company has done a very good job of
significantly reducing the risk of another incident while still
maintaining the freshness and taste of its food." They also said
Chipotle could expand mobile ordering and catering and more than
double its store count to grow sales, even if the chain didn't win
back all of its customers.
Write to David Benoit at david.benoit@wsj.com and Julie Jargon
at julie.jargon@wsj.com
(END) Dow Jones Newswires
November 18, 2016 07:25 ET (12:25 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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