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Chipotle Mexican Grill Inc. $50 – New York symbol CMG

CHIPOTLE MEXICAN GRILL INC. $50 (New York symbol CMG) is an 50.8%-owned McDonald’s unit that operates 500 Mexican food restaurants in 23 states. This past January, Chipotle sold “A” shares (one vote per share) to the public at $22 each.

McDonald’s offer lets its investors exchange all or some of their shares for Chipotle Class B common shares (10 votes per share; New York symbol CMG.B). The company will calculate the final exchange ratio before the offer expires on October 5, 2006.

McDonald’s designed the offer so that its investors get to acquire Chipotle at a 10% discount. It feels the swap is tax-deferred, but the IRS has yet to issue a final ruling.

The deal resembles but does not quite qualify as a spin-off. Chipotle is far smaller and riskier than Mc- Donald’s, but growing much faster. It could drop after the swap, eliminating the benefit of the 10% discount.

McDonald’s will limit the exchange ratio to 0.9157 of a Chipotle share for each McDonald’s share tendered, but at current prices you’d get just 0.8186 of a Chipotle share. After McDonald’s sets the final ratio, you’ll have two trading days to withdraw your shares.

If you can accept the added risk, we think you should accept the offer.

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