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Advisers disagree on Applebee’s-IHOP deal

OVERLAND PARK Kan. Two stockholder advisory firms issued opposing assessments on Thursday of the pending $2.3 billion acquisition of Applebee’s International Inc. by IHOP Corp., with one advising Applebee’s shareholders to vote for the deal and the other recommending the purchase be opposed.


Both assessments pivoted on a comparison of the $25.50-per-share buyout proposal with the “stand-alone” recapitalization strategy that had been put forth by Applebee’s management as part of the company’s strategic review, which included the evaluation of multiple buyout offers and internal financing options. Each also cited the disagreement within Applebee’s 14-person board over IHOP’s final offer, which was ultimately accepted by a 9-5 vote.



That division within the boardroom was cited by Glass Lewis & Co. as a key reason for its decision to recommend shareholder approval of the deal, which will be put to a stockholder vote at a meeting scheduled for Oct. 30 near Applebee’s headquarters here.



“Applebee’s board appears to be functioning well: Its members had open disagreements, directors expressed their differences of opinion, and it received the advice of multiple outside experts,” the company said in explaining its conclusion. “We do not believe that the board of directors has taken the decision to sell the company lightly.”



Indeed, it noted, the board discussed and “had the opportunity to endorse the stand-alone recapitalization strategy.” That plan called for a $1.6 billion recapitalization and a bridge loan to fund a special one-time shareholder dividend. Applebee’s was already pursuing a plan to bolster shareholder value by selling its 508 company-run restaurants to franchisees and cutting costs, among other measures.



But, Glass Lewis said, the majority of directors lacked “an adequate level of confidence in the executive team” and the value of its plan.



“In our opinion, this is particularly telling,” Glass Lewis said.



For that and other reasons, the firm said, “we believe that this proposal is in the interest of shareholders.”



Yet the board’s split was cited by Proxy Governance Inc. as one of the reasons for its recommendation that Applebee’s shareholders vote against the deal.



“This is admittedly a tough call,” the Philadelphia-based firm said of its conclusion. “While we support the board’s involvement in the decision process and think that the company was well-shopped, we are not convinced that the offer represents the best value for shareholders.”



It noted that IHOP’s plan for reviving the troubled Applebee’s brand is similar to the turnaround strategy that Applebee’s management had drafted, and that little or no value is expected to come from synergies. IHOP’s share price jumped 9 percent on the day the purchase agreement was announced and rose an additional 2.5 percent through Oct. 18. Proxy Governance suggested that Applebee’s shareholders could realize growth of that scale if the company remained independent, since the same turnaround plan would be virtually the same.



“We are inclined to believe that the opportunity to share in the potential upside offered by the stand-alone plan outweighs the certainty that comes with accepting IHOP’s all-cash merger consideration,” the company concluded.



In addition, it noted, analysts have been mixed in their assessment of the deal and the $25.50-per-share price, which represents a 4.6-percent premium over Applebee’s share price on the last trading day before the IHOP deal was announced on July 16.



“Those concerns are compounded by the merger’s failure to receive unanimous board approval, with opposition being voiced by current or former executives and two independent directors,” Proxy Governance said.



Five of Applebee’s 14 directors — including chairman Lloyd Hill, chief executive David Goebel and chief financial officer Steve Lumpkin — indicated last month in the company’s proxy statement that they had voted to reject IHOP’s offer because they adjudged it too low. The other two dissenters were Burton “Skip” Sack, a former CEO and franchisee of Applebee’s, and outsider Erline Belton.



The proxy indicated that the five intend to vote against the deal. They collectively control 5.1 percent of Applebee’s approximately 75 million shares outstanding.



Sardar Biglari, chairman and chief executive of the Western Sizzlin Corp. family-steakhouse company and an investor in Applebee’s and several other restaurant concerns, also has said he intends to vote against the IHOP deal because of the price. Through The Lion Fund LP hedge fund and his other investment vehicles, Biglari controls about 1 million Applebee’s shares, including common stock underlying over-the-counter call options.



Applebee’s issued a statement late Thursday in response to the contradictory shareholder recommendations. “The recommendation of Glass Lewis supports the Applebee’s board’s decision that this sale is in the best interest of Applebee’s shareholders," said spokeswoman Laurie Ellison. "The board urges all Applebee's shareholders to vote their shares 'for' the sale with IHOP."



She added, “We respectfully disagree with Proxy Governance’s recommendation.”



An approval of the deal would make Glendale, Calif.-based IHOP one of the industry’s largest franchisors of full-service restaurants. Most of the 1,319 pancake houses currently flying the IHOP flag are franchised, and more than 1,400 of the 1,950 Applebee’s restaurants are franchised.


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