Applebee's owners OK sale to IHOP, paving way for turnaround plans

Nation's Restaurant News,  Nov 12, 2007  by Sarah E. Lockyer

Tags: Applebee's

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[ILLUSTRATION OMITTED]

OVERLAND PARK, KAN. -- At a somber and sparsely attended meeting here Oct. 30, Applebee's International Inc. shareholders voted by a wide margin to approve a $2.3 billion buyout of the company by IHOP Corp., setting the stage for the pancake specialist to begin its aggressive turnaround plan for the beleaguered casual-dining chain.

The merged companies, whose chains would boast more than 3,250 restaurants and systemwide sales of about $6.8 billion, will be one of the largest restaurant companies in the industry. Its chains' annual sales would exceed those of the chains in the systems of Brinker International and OSI Restaurant Partners, and would rival the sales of Darden Restaurants, whose acquisition of Rare Hospitality Inc. is expected to boost Darden's annual revenues to around $6.6 billion. The U.S. corporate revenues of the combined IHOP-Applebee's entity would surpass those of Bob Evans Farms Inc., The Cheesecake Factory Inc. and Burger King Holdings Inc.

After an expected name change to reflect the IHOP and Applebee's brands, the merged company would be led by IHOP chairman and chief executive Julia Stewart, who was U.S. president at Applebee's from 1998 until 2001, when she moved to IHOP.

Stewart has said she would move ahead with a "thoughtful, diligent and deliberate" plan to reverse the stalled sales and declining profit growth that Applebee's has experienced for more than two years. Applebee's operates or franchises more than 1,950 restaurants; IHOP is parent to a mostly franchised system of 1,323 family-dining restaurants.

To facilitate a turnaround at Applebee's, Stewart has said IHOP would halt the chain's future corporate-restaurant development, sell to franchisees the majority of its 508 corporate locations, orchestrate sale-leasebacks of real estate assets, and reduce general and administrative and capital expenditure costs. "We've been down this road before and successfully led a total business transformation and reenergized a well-known brand," Stewart said in July when the deal was first announced, referring to her work at IHOP. "We plan to do it again with Applebee's."

While Stewart was out of the country on the day of Applebee's shareholder meeting, IHOP said in a statement that "by working in collaboration with the Applebee's associates and franchisees, [IHOP] believes that [Applebee's] can again achieve the success it enjoyed in the past."

Most analysts have stayed on the sidelines since the deal was announced in July through the Oct. 30 shareholder vote. Some industry watchers believe that Stewart will have a harder time reversing course at Applebee's than she did at IHOP because of the chain's larger size and because of macroeconomic factors now working against the casual-dining segment, including higher commodity and labor costs and pressures on consumers to spend less.

Applebee's franchisees have been reluctant to discuss the brand's future openly. However, a large franchisee who requested anonymity because of his future dealings with IHOP said he looked forward to working with Stewart and her team to revitalize the Applebee's brand. He also expressed excitement about his potential purchases of Applebee's-owned restaurants that would soon be on the block--probably at buyer-friendly prices.

In July, IHOP said it expected to sell 40 corporate-operated Applebee's branches per quarter to existing or new franchisees, beginning next year. Those transactions could garner about $550 million, IHOP said.

The Glendale, Calif.-based parent of the IHOP and International House of Pancakes brands plans to finance the acquisition through an asset-backed securitization of Applebee's. The company already has secured a bridge loan to fund the deal while the securitization is completed. The respective head quarters of IHOP and Applebee's are expected to remain in California and Kansas.

At press time, sources told Nation's Restaurant News that IHOP human resources officials were in Kansas to discuss with Applebee's management whether certain executives would remain.

At their Oct. 30 meeting, Applebee's shareholders controlling more than 70 percent of its shares outstanding voted to accept IHOP's offer of $25.50 per share and the assumption of $155 million in debt. The merger was expected to be finalized by Nov. 29.

IHOP's buyout of Applebee's has been made dramatic by disputes among Applebee's board members, lawsuits both settled and pending, and public displays of shareholder discontent. Shareholder advisory firms were split in their recommendations about the deal, with some saying IHOP's price was too low. The Applebee's insiders on the board--chairman Lloyd Hill, chief executive David Goebel and chief financial officer Steven Lumpkin--voted against the deal.

Another dissenting director, Burton "Skip" Sack, a former Applebee's executive vice president and franchisee and the company's largest independent shareholder, was poised to file a lawsuit asserting reappraisal rights on his shares because he contends that IHOP's price undervalued Applebee's. His bid to have the value of his shares determined in court would begin after the deal closes, he said, declining further comment on the pending lawsuit.