If Starbucks bought Chipotle Mexican Grill, a possibility the Financial Times reported this week was being explored by the coffee giant, it would be the largest purchase of one restaurant chain by another ever in the U.S.
It would also almost certainly be one of the biggest missteps, given the limited synergies between the two brands, the size of the deal and the potential distraction as Starbucks’ brass works on its turnaround.
Chipotle investors initially reacted well to the report, with shares rising as much as 8% on Thursday after the report was published. They are now back down to roughly where they were before the article.
It’s easy to understand their enthusiasm: Starbucks’ Brian Niccol is the star CEO who knows Chipotle intimately after turning it around in his six years leading the burrito chain, before leaving in 2024 to fix Starbucks. On his watch, Niccol led Chipotle out of a food safety crisis, improved its restaurants and operations, built a leading app, and ultimately helped Chipotle double annual sales to $10 billion. But more recently Chipotle has struggled and its shares have fallen by almost half since his successor took the reins almost two years ago. (Chipotle did not respond to a request for comment.)
Starbucks investors reacted rather differently to the report, sending shares down on fears a transaction like that would be a big distraction, even for a CEO as well regarded as Niccol who is being credited with getting Starbucks out of a long slump and back to growth and in the good graces of its customers.
“Starbucks is still executing its turnaround strategy, and acquiring Chipotle could consume significant senior management time on financing, integration, organizational design, systems, and personnel,” BTIG analyst Pete Saleh wrote in a note. Starbucks itself told Fortune in a statement it was “laser focused” on that turnaround.
The fact that shares in both companies have essentially returned to where they were before the FT article suggests the stock market has concluded the deal is unlikely to happen.
Chipotle’s market capitalization is about $40 billion, meaning Starbucks would likely have to offer $50 billion (or half of Starbucks’ current valuation) with the standard 20% acquisition premium.
That enormous sum in turn would require Starbucks to borrow tens of billions of dollars, with interest expense damaging its profitability and potentially diverting money away from the investments it is making to upgrade its coffee shops. Investors are already watching Starbucks’ capital spending closely given how pricey cafe makeovers and store equipment to improve its service can be and how they eat into profit margins. The company could also use equity but that would also have undesirable effects and pressure shares.
Ultimately, a Starbucks-Chipotle deal offers little in terms of improving both companies’ performances. Wall Street firm William Blair estimated about $300 million in potential annual corporate and technology savings, to be sure, but that hardly justifies a $50 billion deal. What’s more, Starbucks is focused on beverages, and the food it does sell is largely pre-made, while Chipotle makes freshly prepared foods.
And so many observers are concluding that the initial appeal of the deal had to do with the regard the market holds for Niccol as a leader. “The clear anchor to why this would make any sense is management,” Citi analyst Jon Tower wrote in a note.
But even someone as talented as Niccol is can only do so much at once. Focus is core to succeeding a turnaround. And indeed, some of Niccol’s moves at Starbucks have involved getting rid of some complexity and distractions, notably selling majority control of Starbucks’ China business last year.
Niccol has little experience integrating other brands or dealing with M&A. He was enormously successful at Taco Bell, then at Chipotle, and now at Starbucks by being relentlessly focused on restaurant operations and customer experience. And with this deal apparently unlikely to happen, he can continue to be.
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