Monday, July 16, 2007

WSJ: IHOP Buys Applebee's for $2.1 Billion

IHOP Buys Applebee's for $2.1 Billion
In Bold Move for Pancake Chain

July 16, 2007 9:12 a.m.

IHOP Corp., the company behind the well-known pancake houses, said Monday it sealed a deal to buy Applebee's International Inc., the largest casual-dining restaurant chain by locations and sales, for about $2.1 billion.

The deal, which was approved by both companies, will give Applebee's holders $25.50 for each of their company shares, a 4.6% premium to where Applebee's shares traded Friday on the Nasdaq Stock Market, but below the company's 52-week high of $29.10.

The move is a gutsy call for IHOP, of Glendale, Calif., and its chairman and chief executive, Julia Stewart. IHOP's market capitalization is roughly half that of Applebee's, of Overland Park, Kan., and IHOP will have to take on substantial debt to fund the purchase.

But the company sees opportunity in putting the two chains together, which combined would represent 3,250 restaurants and sales of nearly $7 billion. In particular, IHOP plans to sell most of Applebee's 500 company-owned restaurants and their underlying real estate to pay down some acquisition debt. The company will focus on franchising opportunities in both the U.S. and abroad.

The move may appease Applebee's investors, who've been pressuring the chain to make drastic moves to reward them after years of slumping performance. But reviving the Applebee's brand could be a difficult task in part because the bar and grill sector is suffering from a glut of competitors.

Ms. Stewart, of IHOP, was president of Applebee's domestic division until 2001. She joined IHOP as president and chief operating officer later that year and became CEO in 2002. Ms. Stewart has said IHOP is interested in buying other chains. Analysts credit Ms. Stewart with reinvigorating the IHOP brand and generating more free cash flow by shifting costs to franchisees.

Applebee's, the nation's largest sit-down restaurant chain with about 2,000 locations, is trying to upgrade its menu to lure higher-income customers who are less sensitive to pressures on consumer spending. But a new menu it launched last year, with items like a bruschetta burger, have failed to reverse a slide in same-store sales. Analysts have said that Applebee's needs to remodel its dated-looking restaurants, something that could require significant spending. For the 13 weeks ended April 1, Applebee's reported net income of $9.5 million on revenue of $337.6 million.

Applebee's put itself up for sale in February after investor Richard C. Breeden launched a campaign for board seats. Mr. Breeden, a former Securities and Exchange Commission chairman, won a board seat in April and is on the committee that weighed the sale. IHOP's reliance on franchisees to operate almost all its restaurants fits with Mr. Breeden's strategy of urging Applebee's to own fewer of its locations.

The move comes as mid-priced sit-down restaurants are trying to pull themselves out of one of the industry's worst slumps in several years. A second consecutive summer of high gasoline prices, coupled with declining home values, has eaten into the wallets of the middle-class customers on which Applebee's built its dining empire.

Greenhill & Co. and law firm Skadden, Arps, Slate, Meagher & Flom advised IHOP. Citibank, Banc of America Securities, and law firms Cravath, Swaine & Moore, Simpson Thacher and Bartlett LLP and Blackwell Sanders advised Applebee's, with Lehman Brothers acting as underwriter and provider of bridge financing, if necessary.

Write to Dennis K. Berman at and Janet Adamy at

No comments: