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IHOP Corp. serves up $2.1B buyout offer for Applebee’s

IHOP Corp. serves up $2.1B buyout offer for Applebee’s

GLENDALE CALIF. IHOP Corp. completes its pending $2.1 billion acquisition of Applebee’s International Inc., it could create a company that boasts systemwide sales of $6.8 billion and, in time, two successful turnaround stories under one umbrella. —If

The agreement, which had been a rumor just weeks ago and was announced July 16, includes Glendale-based IHOP paying $25.50 per share in cash to Applebee’s shareholders. The plan is for IHOP to oversee a complete turnaround and total business remodel of 1,943-unit Applebee’s, much like the 1,319-unit IHOP chain underwent beginning in 2001. —If

“It is clear that the combination of IHOP and Applebee’s will be a larger, more diversified business with more opportunities to create value,” Julia Stewart, chairman and chief executive of IHOP, said in a conference call with shareholders and analysts. —If

“We’ve been down this road before and successfully led a total business transformation and reenergized a well-known brand, and we plan to do it again with Applebee’s.” —If

IHOP said it would finance the all-cash transaction with $2 billion in debt securitization backed by both companies’ assets. The structure of the deal was somewhat surprising to some industry observers, as securitized debt is a relatively new form of financing to the restaurant industry and many had assumed Applebee’s would be sold to a private-equity player. —If

The transaction could have positive implications for other restaurant brands currently on the block — or at least rumored to be — including Wendy’s International Inc. and Brinker International Inc. Analysts said the IHOP-Applebee’s deal is a positive sign of the continuing high value of restaurant brands and the easy access to capital in various forms. —If

Some analysts pegged the $2.1 billion price tag as lower than expected, as previous estimates had put the sale price of Applebee’s in the $3 billion range. Most conceded, however, that because Applebee’s strategic review process had been ongoing since February, higher offers would already have been considered. —If

“While Applebee’s shareholders will unlikely be happy with the price, we do not see another likely course of action,” securities analyst John Ivankoe at J.P. Morgan Securities Inc. said in a report. “Still, our previous analysis showed possible ‘strategic’ value at $29 to $30 [per share]. We expect many shareholders to push for more.” —If

Both companies’ boards of directors have approved the deal, and the companies said in a joint statement that they expect the transaction to close in the fourth quarter, pending approval from Applebee’s shareholders, customary closing conditions and regulatory approvals. Because the transaction does not involve a stock-for-stock swap, IHOP shareholders do not need to approve the deal. —If

One of Applebee’s largest and most vocal shareholders, Richard C. Breeden, would not comment on the pending deal. Breeden, the former Securities and Exchange Commission chairman turned hedge fund founder, owns more than 10 percent of Applebee’s stock and successfully garnered two seats on the company’s board of directors and a place on its strategic review committee amid his criticism that Applebee’s shareholder returns had plunged and changes needed to be made. —If

IHOP’s turnaround plan for Applebee’s would implement many of Breeden’s previous suggestions for change, including increased refranchising, reduced costs and leadership replacements. —If

Some analysts predicted that the most discontent could come from IHOP shareholders. —If

“Controversy surrounding this transaction may be louder from IHOP shareholders than from Applebee’s,” Ivankoe said. “Questions will arise regarding the desires of IHOP’s shareholder base, which have recently benefited from a low-risk [and] high-return…and high free-cash-flow-generating business strategy.” With the acquisition, Stewart will take over as head of the Applebee’s brand, a position she said she has had in her sights for some time. She worked at Applebee’s as domestic president from 1998 through 2001, when she left the then-high-flying, casual-dining brand because she was passed over for the top job. —If

“I really wanted to be CEO [at Applebee’s],” Stewart said in an interview, “and that wasn’t going to happen any time soon.… Along came IHOP and said, ‘We want you to do that for us.’ Everything has a way of working out, I guess.” —If

Still, the pending acquisition was not about her, she said, but about building value for IHOP shareholders and giving the company a chance to use its “proven capabilities” in turning around a brand and restructuring a franchised business. —If

Stewart plans to execute what she termed a “thoughtful, diligent and deliberate” turnaround plan for Applebee’s, which has struggled for more than two years with negative same-store sales and declining profit. It is a move she successfully orchestrated at IHOP, many observers say. —If

In 2001, IHOP was suffering from stagnant sales and its franchisees were unhappy with the brand’s performance and corporate leadership. The company also served as much as a restaurant developer and builder as it did an operator and franchisor. —If

Stewart and her team worked to change that through refranchising corporate locations, reducing costs and providing better support to franchisees. The company’s systemwide sales jumped, its same-store sales turned positive — and still are — and IHOP no longer develops restaurants or lends to its franchisees. —If

“IHOP is no doubt qualified to run Applebee’s, from its CEO with historical ties to the company, to its own successes in refranchising the IHOP business, turning a once-sleepy company into a stock up 30 percent over the past year,” securities analyst John S. Glass at CIBC World Markets said in a research note. —If

IHOP’s plans for Applebee’s include a ceasing of corporate-restaurant development, the sale of corporate stores to franchisees, a sale-leaseback of owned realestate assets, and a reduction in general and administrative and capital expenditure costs. —If

In addition, Stewart said she wants to develop a “crystal clear” understanding about Applebee’s brand positioning through consumer and market research. Once a brand vision is agreed upon, Applebee’s can move ahead with remodels, menu changes, advertising alterations and whatever else is needed to revitalize the concept, Stewart said. —If

The joint statement from IHOP and Applebee’s did not address official management changes, but Applebee’s current president and chief executive, Dave Goebel, said the Applebee’s management team “looks forward to working with the IHOP management team during the transition period.” —If

Stewart said it was too early to say which members of Applebee’s staff would join IHOP, but she did say the brands would continue to “operate independently with dedicated marketing, operational, and research and development leadership.” —If

Stewart said it was also too early to discuss whether any members of Applebee’s board of directors would join IHOP’s board. —If

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