February 14, 2006
Buy The Big Mac, Sell The Burrito - Forbes.com
Posted by Victor Fleischer

A little fast food arbitrage opportunity, thanks to McDonalds and Chipotle -- or that's what's suggested by the headline from this story on Forbes.com.  I would have gone with Buy the Big Mac, Short the Burrito. 

I find this particular capital markets scenario fascinating:  i.e., where a parent company has completed an IPO of a sub, but retains majority control.  Strange things can happen to valuations as the companies get measured using different business model assumptions.  The most striking example was in the dot com days, when, after the IPO but before the spin, Palm was worth more than its parent, 3Com.  (Since 3Com still owned 80% of Palm, this didn't make a lot of sense.)

McDonalds is still worth way more than Chipotle, but I wonder if McDonalds has more financial or regulatory engineering maneuvers in the works that might unlock shareholder value.  I would guess that the more McDonalds can strip the company down to the brand, the more valuable it becomes for diversified shareholders.  For example, using contracts with franchisees (and/or a REIT spin?), McDonalds could shift real estate risk off the books. 

The Chipotle IPO is one of the case studies in my Deals course this semester, and I'll report back on what the students and I come up with. 

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