By Svea Herbst-Bayliss

BOSTON (Reuters) - Activist investor William Ackman is hungry to repair Chipotle Mexican Grill <CMG.N> after taking a stake in the burrito chain and could begin by shaking up a long-serving board and possibly replacing the two co-chief executives, analysts and investors said.

Chipotle is struggling to revive sales after food-borne illness outbreaks and its share price is down nearly 40 percent in the last year. Ackman, who made his reputation by ousting what he considers underperforming board members and executives, in a filing on Tuesday called Chipotle shares undervalued and said he would speak with management but did not lay out specific next steps.

"Ackman tends to come in forcefully and now everyone on the board, including the two CEOs, is under reconsideration," said Dieter Waizenegger, executive director of CtW Investment Group which works with union-sponsored pension funds that invest in Chipotle.

Chipotle shares rose 5 percent to $436.26 in Wednesday trading a day after Ackman's Pershing Square hedge fund disclosed a 9.9 percent stake in the chain.

Ackman has helped force out Fred Green as CEO at Canadian Pacific and John McGlade as CEO at Air Products.

Outside of personnel changes, Wall Street analysts say the usual activist game plan for revitalizing a restaurant chain, such as refranchising stores, is likely not in play.

"(Chipotle) has no existing franchise base to use to rekindle this, and there are significant risks to culture and execution," analysts at Morgan Stanley said in a research note.

Instead, fund managers and analysts want the company to recapture its reputation for serving healthy food through quality control changes.

Chipotle "begged for an activist to go in," said Waizenegger, citing its depressed stock price and chummy board.

"The presence of a large and vocal investor may provide management with more incentive to hasten their turnaround efforts, which appear to have stalled," the Morgan Stanley analysts wrote.

A Chipotle spokesman said on Wednesday that the chain has held its first call with Ackman and expects to meet with him soon.

For Ackman, the investment in Chipotle takes him back to his wheelhouse of investing in fast food restaurants after he made money at McDonald's and Burger King. He also could have allies in Vanguard Group, the largest U.S. mutual fund company, which held a 9 percent stake in Chipotle at the end of June.


Industry analysts expect Ackman will likely focus on helping revamp Chipotle's board, which has come under fire from shareholders for having served too long, lacking relevant skills and being too chummy with top management.

At Chipotle, board members have served for an average 13 years, far longer than the average 8.5 years board members serve on S&P 500 companies, according to executive recruiting firm Spencer Stuart.

Chipotle shares in June sank to their lowest level in three years following a bearish report from a Deutsche Bank analyst. And there is waning confidence in Chipotle's leadership in some quarters.

Sales at restaurants open at least 13 months fell 23.6 percent in the quarter ending June 30. The company said when it reported quarterly results on July 21 that comparable sales trends in July had improved by 200 to 300 basis points.

"Importantly, management has struggled to demonstrate a proven strategy," analysts at Barclays said in a Tuesday research note. "Without a full sales recovery, we believe unit growth, restaurant margins, and ultimately EPS growth will remain tempered."

Vanguard, in a rare move, this year voted against the pay package for Chipotle co-CEOs Steve Ells and Monty Moran. Their combined compensation was $27.4 million in 2015. CtW's Waizenegger said he would like to see the two executives have more stock ownership in the company. Vanguard was not immediately available to comment.

In 2015, Ells and Moran realized a combined $154.4 million from exercising stock options, according to Chipotle’s proxy statement.

Some things Ackman could pressure the company to work on include beefing up its expertise in marketing, cost control and information technology, industry analysts said.

In their latest round of commentary letters to investors, several U.S. mutual fund managers said they believed Chipotle would get back on track with customers. The Fidelity Blue Chip Growth Fund, which owned $286.4 million worth of Chipotle stock at the end of July, said it remained "cautiously optimistic" on Chipotle and added slightly to the fund's position in the second quarter.

(with additional reporting by Ross Kerber; Editing by Tim McLaughlin and Meredith Mazzilli)