This content is from: Portfolio

The Morning Brief: Chipotle Is Ackman’s New Nightmare Despite Recent Gains

The restaurant chain, which is one of the Pershing Square founder’s largest long positions, is facing a sharp increase in avocado prices and a price target cut by investment bank Credit Suisse.

  • By Stephen Taub

More woes for one of Bill Ackman’s troubled activist positions. Credit Suisse cut its price target on Chipotle Mexican Grill, from $335 to $320, and lowered its estimates, asserting that a sharp rise in the price of avocados poses a risk to the casual dining chain’s third-quarter and fourth-quarter earnings. The bank points out that avocado prices have surged 75 percent since mid-July and are up more than 50 percent year-over-year due to supply shortages. This is important given that avocados account for 10 percent of Chipotle’s total costs.

Meanwhile, Chipotle is suffering from same-store sales weakness due to a new norovirus breakout. Although the stock was up nearly 4 percent over the past two days, at $308.70, it is still down 37 percent or so since mid-May.

“We would not be buyers on recent weakness,” Credit Suisse tells clients. Meanwhile, short interest hit a year-to-date low of $1.3 billion in early July. But since then it has increased by 21 percent, to nearly $1.6 billion, according to a report from Ihor Dusaniwsky, managing director of predictive analytics at S3 Partners, a financial analytics firm. Last December Chipotle agreed to add four board members as part of a compromise settlement with Ackman’s Pershing Square Capital Management. At the end of the second quarter Pershing Square was the largest shareholder, while the stock was the activist’s third-largest long position. Ackman declined to comment.

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Paul Singer’s Elliott Management has boosted its stake in Stada Arzneimittel AG, a German maker of generic drugs, to 9.6 percent, according to Reuters. Private equity giants Bain Capital and Cinven recently prevailed in their bid to buy the company for $6.3 billion in what is being called the largest acquisition by a buyout firm. They acquired 63 percent of Stada, the minimum acceptance threshold set by the acquirers. Elliott’s stake, as of August 18, suggests it did not tender its shares to the two acquirers. Stay tuned for the next chapter in this potential saga.

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Adage Capital Partners disclosed that as of August 16, it owned 1.725 million shares of Intec Pharma, or 6.64 percent of the drug development company. The Boston hedge fund firm did not own any shares of the company at the end of the second quarter.

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Highbridge Capital Management has provided Inseego Corp. with a new $48 million term loan facility, which matures in three years. Inseego is a provider of software-as-a-service and mobile broadband products for the so-called internet of things. As part of the deal, the company exchanged $14.9 million of its existing convertible notes due 2022 into about $11.9 million of the new-term loan facility and 2 million shares of the company’s common stock. A portion of the proceeds was used to repay the company’s previous senior credit agreement, due May 8, 2018.

“We are supportive of the management team’s strategy to right-size the cost side of the business, accelerate the Company’s growth and increase free cash flow generation,” said Jonathan Segal, managing director of Highbridge, in a press release. “Following the solid progress to date both in cost savings and customer wins, we believe this access to additional capital will provide Inseego the ability to significantly improve its profitability.”

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