Would Starbucks buy Chipotle? It’s a long shot

We restaurant journalists have a standard example to represent the biggest possible story we could imagine in the business. “Don’t bother me unless McDonald’s buys Burger King.”

The report in the Financial Times this week comes awfully close. Starbucks, the coffee shop giant currently run by Brian Niccol, has talked with advisors on a potential acquisition of Chipotle, the fast-casual burrito chain formerly run by Brian Niccol.

When it comes to restaurant industry mergers and acquisitions, Starbucks buying Chipotle would be something akin to putting Bryce Harper in a home run derby with a bunch of middle schoolers.

Chipotle’s market capitalization is $39 billion. The largest acquisition to date is the 2014 purchase of Tim Hortons by Burger King for $11.4 billion. Adjust for inflation, and that’s still a $16 billion deal, meaning that a Chipotle purchase would be well over double the next biggest industry acquisition, and that’s before considering any sort of premium to convince Chipotle shareholders to do it.

And it would cost a premium. Starbucks would likely have to fork over some $50 billion to buy Chipotle. That would be about the same valuation as the next four largest deals in industry history after adjusting for inflation.

In short, it would be a very big deal.

But that size is likely why it won’t happen. There is considerable skepticism throughout the investment community in the likelihood of the deal actually making it to completion.

Starbucks could fund the deal, likely through a combination of stock and debt, though William Blair analyst Sharon Zackfia suggested that the coffee chain could sell its Japan market and use those funds to help buy Chipotle.

Based on data from Restaurant Business sibling company Technomic, the acquisition would create the fourth-largest restaurant operating company in the world, based on system sales, behind McDonald’s, Yum Brands, and Restaurant Brands International. It would be just ahead of Arby’s owner Inspire Brands.

It’s easy to see why this deal would work from Chipotle’s perspective. The fast-casual burrito chain’s stock is down 45% since Niccol left. Same-store sales have been no higher than 2.2% in the past six quarters, three of which were negative.

The chain would get the benefit of Niccol’s return. And Chipotle would get the benefit of Starbucks’ international market knowledge to speed growth outside the U.S.

It’s tougher to see how this works from Starbucks’ perspective. The company would have to convince shareholders to accept more debt and a diluted ownership percentage, because Chipotle shareholders would get a chunk of the company in exchange. The two companies are real-estate powerhouses, so that might be one benefit. And Starbucks would get the benefit of Chipotle’s growth.

Yet there are loads of risk for Starbucks beyond that. Niccol’s time would be divided between multiple chains.

There are few synergies to be gained, outside of some corporate overhead, because the two companies have very different supply chain needs. Perhaps there are some marketing or technology benefits. Maybe they can create a powerful joint loyalty program.

Yet it’s not easy to operate more than one concept. McDonald’s once owned Chipotle, and several other smaller concepts, and got rid of them to focus on its core brand. Several other companies have struggled after buying other concepts because the drive for synergies to make deals work creates too much disruption.

Maybe the biggest risk is just more change. Starbucks has gone through a lot over the past few years, including multiple CEO changes, restructurings, and layoffs. Adding more change by folding in another brand could prove particularly challenging.

Starbucks doesn’t need Chipotle. McDonald’s proved well enough that a big company can get plenty bigger over time and reward shareholders in the process.

None of this is to say that the deal won’t happen. It could. But it’s a big, risky deal that will be immensely complicated to pull off, and expensive to boot, and with an uncertain payoff. In the end, it might prove to be too much. But it’s fun to think about.