Starbucks shuts down Chipotle talk after its own stock objected

0:05Host:MBA Training. Ten minutes on Starbucks shuts down Chipotle talk after its own stock objected. "As a matter of policy, we don't comment on rumors and speculation, but we want to be clear we are not buying Chipotle." That's Starbucks, Monday morning.

0:21Expert:The policy lasted until the comma.

0:25Host:Rewind for me. How does a coffee company end up denying it wants burritos?

0:30Expert:On Thursday the Financial Times reported, citing people familiar with the matter, that Starbucks had worked with advisers in recent months on a takeover proposal for Chipotle. Starbucks said it doesn't comment on rumours. Then on Monday it commented to CNBC, to Reuters, to everyone.

0:49Host:And the reason anyone took it seriously...

0:52Expert:...is Brian Niccol. He's Starbucks' chief executive, and before that he ran Chipotle. The story wrote itself: the boss buys back his old company.

1:03Host:That's not M&A, that's a reunion tour.

1:06Expert:M&A means mergers and acquisitions, for anyone who has been spared the banker pitch books. And yes, CNBC says Chipotle investors were looking forward to the reunion. Starbucks investors very much were not.

1:22Host:How did they show it?

1:23Expert:CNBC reported that Starbucks stock dropped sharply on Thursday morning, then clawed most of it back, while Chipotle jumped. By Friday, Fortune noted, both stocks were roughly back where they started.

1:37Host:Wait, what? So the market killed the deal before Starbucks did.

1:41Expert:That's how Fortune read it: the market had decided it wasn't happening. On day one, D.A. Davidson's Matt Curtis put the odds at about one in five, per CNBC.

1:53Host:Isn't that normal, though? The buyer's stock dips and the target pops. Every deal.

1:58Expert:CNBC said as much: it's not unusual. What matters is the reason, and here the reasons were specific.

2:06Host:Give me the reasons. Not vibes.

2:09Expert:Start with price. A takeover premium is the extra you pay above the market price so the target's board says yes. Fortune worked out that with a standard premium, Starbucks would be paying roughly half of its own market value.

2:24Host:For burritos.

2:25Expert:For burritos with very little overlap with coffee. Fortune also pointed to limited synergies, meaning the extra sales or savings you only get by combining two companies.

2:37Host:So how do you even pay for it?

2:39Expert:Two ways, and both are ugly. If you borrow, William Blair's Sharon Zackfia estimated, per CNBC, that Starbucks' leverage would balloon to about six times. Leverage here is debt divided by a year of operating profit before interest, tax and depreciation.

2:59Host:Translate that for people who don't sleep with a credit agreement under the pillow.

3:03Expert:It means years of profit just to pay the debt back. Your rating agency gets chatty, your interest bill swells, and the first thing you cut is capex, meaning capital spending. For Starbucks that's the store upgrades the whole turnaround depends on. Fortune flagged exactly that.

3:22Host:And option two?

3:24Expert:Pay in shares. Zackfia figured an all-stock deal would still cut earnings per share by about a tenth. Same profit, sliced into more pieces.

3:34Host:A pizza analogy. At a burrito company. That's a dollar in the pun jar.

3:39Expert:That's a metaphor, not a pun.

3:42Host:The jar doesn't do nuance.

3:44Expert:Fine. Put it on my tab.

3:47Host:Now let me argue the other side, because there is one.

3:51Expert:There is, and it isn't stupid.

3:54Host:Chipotle is on sale, and the buyer's boss knows the kitchen. No due diligence surprises.

4:00Expert:Fair. CNBC notes Chipotle shares are down about a fifth over the past year, which makes it a cheaper target. And Fortune says much of the appeal came from how highly the market rates Niccol.

4:13Host:So the operator is the synergy. He knows where the bodies are buried.

4:18Expert:He knows where they were buried when he left. Kitchens get remodelled.

4:22Host:Oh, come on.

4:24Expert:I mean it. Knowing the business removes the "we didn't understand what we bought" risk. It does nothing for the financing, and nothing for bandwidth.

4:34Host:Bandwidth meaning management time.

4:36Expert:Yes. BTIG's Pete Saleh wrote, per CNBC, that a deal could eat significant senior management time on financing, integration, organisational design, systems and personnel. That's the top team's calendar gone, in the middle of a turnaround.

4:55Host:But they're laser focused.

4:57Expert:They said so on Thursday and again on Monday. Reuters has the Monday wording: "laser focused" on the Back to Starbucks strategy.

5:06Host:"Laser focused" is what companies say when they're focused on everything.

5:11Expert:It's corporate for "please stop calling."

5:15Host:Can I say what actually bugs me? Chipotle's people.

5:19Expert:Go on.

5:20Host:CNBC says they're coming off a rocky year when traffic fell. Then they read about their possible sale in a newspaper.

5:27Expert:Yeah, that one lands for me too. Picture the Chipotle finance team building next year's budget while the stock swings on whether their old boss wants them back. Grim.

5:38Host:And Chipotle said nothing.

5:40Expert:It declined to comment, per Reuters. And CNBC, citing Semafor, says Chipotle had already hired advisers to defend against activist investors (shareholders who buy a stake to force changes) or an unwanted bid.

5:56Host:So they were braced. Just not for this guy.

5:59Expert:Not for the alumni edition, no.

6:02Host:Okay, here I'll defend Starbucks. The denial was smart. Fast, clean, stock up, chapter closed.

6:10Expert:Fast, yes. Smart, I'm not sold.

6:14Host:Hang on. Their stock went up and the noise stopped.

6:17Expert:Sure, Reuters has Starbucks up and Chipotle down after the statement. But they broke their own no-comment policy in a single sentence. The next time a rumour hits and they say "no comment," traders will read it as a yes.

6:32Host:That's paranoid. Nobody keeps score of press statements.

6:36Expert:Traders keep score of everything. And look at the tense: "we are not buying." Present tense. It doesn't say nobody looked.

6:46Host:Hang on, say that again.

6:48Expert:The statement denies a purchase. It doesn't deny the advisers. This is my opinion, not a fact: the FT and Starbucks could both be right. The work happened, the market reacted, and the company walked away.

7:03Host:That's lawyerly.

7:04Expert:It's precise. There's a difference, and it's billed by the hour.

7:09Host:I still say you take the win. A quick bounce beats weeks of rumour.

7:14Expert:And I say you just priced your next "no comment." Ask me after the next rumour.

7:19Host:Deal. Not a Chipotle deal.

7:22Expert:Obviously.

7:23Host:Fortune didn't hold back, did it?

7:25Expert:No. It said the deal would almost certainly have been one of the biggest missteps in the sector, because of the size, the weak synergies and the distraction. That's their view, and on the numbers I share it.

7:38Host:So what does a CFO actually do with this?

7:42Expert:Treat your share price as a vote you can see before you sign. EisnerAmper's Paren Knadjian told Reuters that a premium price would likely need debt and equity, which strains leverage and dilutes shareholders. That's back-of-the-napkin maths, and Starbucks' investors did it in a morning.

8:00Host:And the listener, this week?

8:02Expert:Take the biggest deal or capital project on your list and run a leak test. Write the paragraph the Financial Times would print tomorrow: the price, how you pay, what it does to leverage and earnings per share, and who runs the integration. If you can't write it without wincing, your shareholders will write it for you.

8:22Host:And what do we watch?

8:24Expert:Starbucks reports later this month, per NBC News. Watch what they say about capital spending and debt. If Chipotle comes up on the call, I'll eat a burrito bowl live on this show.

8:35Host:That's a pun. Dollar in the jar.

8:38Expert:That's a bet.

8:39Host:The jar doesn't do nuance. Sources: Reuters (via GV Wire), CNBC and Fortune. Every link is in the show notes. We'll leave it there. The CFO self-assessment at mba-training.com will tell you where you really stand.