IHOP to buy Applebee's for $2.1B

GLENDALE Calif. Pancake specialist IHOP Corp. has agreed to acquire casual-dining behemoth Applebee's International Inc. for $2.1 billion in cash, or $25.50 per share, the parties disclosed Monday morning.

The announcement cited a five-point plan for improving Applebee's financial results, including the franchising of its 508 company-operated units; the sale and lease-back of the real estate under those stores; upgrading marketing and operations; and reducing general and administrative costs. It coincided with an announcement that Applebee's had switched its advertising account to McCann Erickson, which is also the agency used by IHOP.

The unusual step of detailing a post-acquisition strategy suggests that IHOP may be seeking the support of dissident shareholder Richard Breeden, who had criticized Applebee's management for the company's sluggish performance in recent years. The acquisition is subject to the approval of Applebee's shareholders.

The announcement indicated that IHOP chairman and chief executive Julia Stewart would assume management responsibility for Applebee's. Stewart is a former president of Applebee's U.S. operations.

“We look forward to applying the same focus and discipline to Applebee’s that we have employed at IHOP over the last several years," she said in a statement. "We have successfully restructured our own company, and in the process, re-energized our brand, improved our operational performance and maximized the development of franchise restaurants.”

IHOP said it would finance the deal in part through the securitization of Applebee's assets, which would presumably include future franchise royalties. Securitization, or using future royalties and anticipated real estate-related revenues as security for bonds or other forms of debt, is relatively new to the restaurant industry. Wendy's International Inc. said it is also looking at securitization as a way of financing a sale of the company.

IHOP said it would also rely on its "securitization structure." The company franchises virtually all of the 1,319 family restaurants that operate under the IHOP and International House of Pancakes brand names.

The parties said they expect the acquisition to be completed during the fourth quarter.

In the deal's announcement, IHOP indicated that it would convert Applebee's into a purely franchised chain, a process undergone by the buyer itself in recent years.

A purchase of Applebee's by IHOP was not unexpected. Rumors surfaced several weeks ago that a bid by the family-restaurant franchisor had been submitted, though all parties declined at the time to comment on the reports. Doubts surfaced at that time that IHOP had the wherewithal to purchase the casual-dining brand—the industry's largest in terms of unit count—without the financial assistance of a private equity firm. Applebee's operates or franchises 1,943 restaurants in total.

IHOP has maintained for months that it was shopping for an acquisition outside of the family sector. It indicated at that time that it was seeking a franchise business.

“Over the past year and a half, we have been evaluating alternatives that would allow us to leverage IHOP’s proven competencies in order to create additional long-term value for shareholders, including a potential acquisition," Stewart said in this morning's announcement. "Applebee’s meets all of our acquisition criteria and we expect the combination to generate significant additional value for our shareholders.”

Applebee's, founded by franchisee Bill Palmer, is renowned in the industry for its warm relations with franchisees.