IHOP purchases Applebee's for 1.9 billion

[Raph's Girl]

http://news.yahoo.com/s/ap/20070716/...op_applebees_9

IHOP's CEO Julia Stewart has been making bold moves to revitalize the 45-year-old chain best known for its breakfast fare and blue-tiled roofs. With a $1.9 billion bid for the bar-and-grill chain Applebee's made on Monday, she may be taking her biggest risk yet.

The move comes as Wall Street analysts anticipate a difficult second-quarter earnings season in the restaurant sector as soaring commodity costs hurt profits and consumers worried over high gas prices ate out less frequently.

Combined, the company would have 3,250 restaurants and $6.8 billion in annual sales.

Stewart, a former Applebee's International Inc. executive, said once the deal closes, IHOP Corp. would revive the Applebee's brand and increase its emphasis on franchises by selling most of the 508 company-owned stores at a rate of 40 per quarter, a process that could take until 2010 to complete. In doing so, the company would reduce the percentage of company-owned stores to 5 percent from the current 25 percent, a transformation similar to the one she led at IHOP beginning in 2003.

"It's a great brand, it just needs to be revitalized," Stewart said on a conference call Monday. "We will fundamentally change the company's business model, moving it nearly completely out of the role of owner-operator."

The changes, which is expected to cut costs by $50 million a year by 2011, reduce the company's risks in owning real estate, a strategy also taken by many hotel companies to stabilize profit growth.

From May 2002, the month Stewart took over as CEO, IHOP's share price is up roughly 75 percent. It closed May 1, 2002, at $35.25 and has since risen to the low $60s.

"She woke them up to a certain degree," Oppenheimer & Co. analyst Michael Smith said of IHOP. "It was a well-recognized brand name. It just needed somebody to slap it around a bit."

Stewart makes the move as Applebee's is pressured to improve shareholder return by the activist investor Richard Breeden and his Breeden Capital Management LLC.

Analysts worry that the all-cash nature of the deal leaves Applebee's investors shut out of any benefit from upward stock movement should the transformation lead to better profits.

"The price and deal structure somewhat surprise us," CIBC World Markets analyst John Glass wrote in a note to investors. Acquisitions are often made with a combination of cash and stock.

It remains to be seen whether Applebee's shareholders including Breeden's firm will endorse the deal, especially given past statements from Breeden that urge improving the business before considering a sale, Glass wrote.

"We expect many shareholders to push for more," JPMorgan analyst John Ivankoe told investors.

Applebee's put itself up for sale in February and has struggled recently, reporting last month that first-quarter profit fell 65 percent.

"I think there's so much upside in the Applebee's brand, I don't worry about the category itself," Stewart told analysts.

Michael Gallo of C.L. King & Associates Inc. said buying Applebee's would be the biggest bet Stewart has made since joining IHOP. Stewart has also introduced new items, such as savory crepes and a healthier menu called IHOP for me, as well as eliminating trans fats and relaunching the Super Rudy Tooty Fresh and Fruity Combos.

IHOP plans to open at least 30 to 45 new franchised Applebee's restaurants per year, IHOP Chief Financial Officer Thomas Conforti said. IHOP also plans aggressive share repurchases to increase shareholder value, executives said.

Conforti said the company does not anticipate any antitrust issues since they are not direct competitors. The deal requires approval by Applebee's shareholders but not investors in IHOP, since it is an all-cash deal. If approved, the deal would close in the fourth quarter.

Under the deal, IHOP will pay $25.50 per share for Applebee's, a 4.6 percent premium over its closing price on Friday.

Applebee's has about 76 million shares outstanding. IHOP is also assuming about $155 million in Applebee's debt in the deal, boosting the total value of the transaction to about $2.1 billion.

Applebee's shares rose 53 cents, or 2.2 percent, to $24.91 in trading Monday. In an unusual move for the shares of a buyer, IHOP stock gained even more, rising $4.99, or 8.9 percent, to $61.24 after briefly reaching a new 52-week high of $63.39.

IHOP is funding the transaction through about $2 billion in securitized debt, and will pay down the debt with profit from the sales of company-owned stores, expected to generate about $550 million, and real estate sales estimated to be worth $400 million.

Applebee's, based in Overland Park, Kan., has 1,943 restaurants worldwide. Same-store sales are down more sharply this year for Applebee's company-owned restaurants than for its franchise locations.

Virtually all of Glendale, Calif.-based IHOP's 1,319 restaurants are now owned by franchisees.

In April, Applebee's struck a deal with Breeden, who is also a former chairman of the Securities and Exchange Commission, to add him and one other person to its board, amid pressure from his firm to improve operations.

Stewart, who was president of Applebee's domestic division from 1998 to 2001, will lead the management team of the combined company.

IHOP said it expects to continue paying a dividend and said the deal should add to earnings starting in 2008.

Raph's Girl note: I just have to say... IHOP sucks....never been to Applebees even tho there's one up the street.

[VaughnMichael]

IHOP does indeed suck I agree Applebee's is a pretty good place actully I'm much more of a fridays person myself gotta love that jack danials chicken! hehe
Anyways I wouldn't say this is good news at all.

[Jamboree]

Not an IHOP fan either. I also prefer fridays. But a billion dollars?! wow.

[VaughnMichael]

Originally Posted by Jamboree

Not an IHOP fan either. I also prefer fridays. But a billion dollars?! wow.

[Scandia]

IHOP is fine, albeit overpriced. It is hard to find vegetarian items at Applebees.

[Jo Dawn]

Applebees mostly sucks. IHOP's not bad. Don't think this'll really affect me. Hehe. Though I'm interested to see what happens here, if anything.

[VaughnMichael]

Originally Posted by Jo Dawn

Applebees mostly sucks. IHOP's not bad. Don't think this'll really affect me. Hehe. Though I'm interested to see what happens here, if anything.

hahaha I so laughed before I came in to this saw saw that you posted Jo I said to myself I know she's gonna go against the majority of people.
And bingo! You did! haha
And I think if anything service would go down hill, as would the quality of the food.

[Mr. Snackpants]

I agree with Jo

Applebees is nothing special. Nothing on their menu that makes me wanna go there. It's just an average resturant that's just about everywhere(which boggles my mind).

I happen to love IHOP on the other hand. There food is ok, but breakfast is my favorite so that's why I love it. Omlets are the best. And....It's open 24 HOURS a DAY!!! Who else does that? Where else can you go get an omlet and some pancakes at 3 in the morning?

[VaughnMichael]

*walks in* *walks right back out*
I'm just messin' but I can honestly say I really don't like either one of the places and ihop now owning the other is just like meh in my book. The only thing I liked at Applebee's was once they has orange chicken it was the best damn orange chicken I've ever had anywhere even better than chinese resteraunts.
But they quickly got rid of it and that was the end of my going to Applebee's.
I also really don't see the big woop about IHOP though it's like every other chain of 24-hour breast serving places I've ever been to.

[Cure]

Originally Posted by Mr. Snackpants

I agree with Jo

Applebees is nothing special. Nothing on their menu that makes me wanna go there. It's just an average resturant that's just about everywhere(which boggles my mind).

I happen to love IHOP on the other hand. There food is ok, but breakfast is my favorite so that's why I love it. Omlets are the best. And....It's open 24 HOURS a DAY!!! Who else does that? Where else can you go get an omlet and some pancakes at 3 in the morning?

Diners. Seriously, New Jersey holds the record for most 24-hour diners. It rules. But yes, Applebee's and IHOP are both really good. It's just food. You guys are acting like the pancakes killed your mothers. I mean, have you guys tried the omelettes? They're HUGE! And relatively cheap, too.

[Scandia]

IHOP's omelettes:

- good? YES
- huge? YES
- cheap? NO

Eating an omelette and a glass of OJ at IHOP costs me more than if I had the buffet and a drink at Sweet Tomatoes.

But boy are those omelettes GOOD.

And the ones near my place (ok, so one of them is also across the street from a major national theme park) are open 24 hours a day indeed. I do not think all the IHOP restaurants are...but being so close to that theme park gives them a big reason to be.

[Buslady]

Our Applebees is pretty good, we just went couple days ago. Pasta...yum.
I hope they don't get sucky with this Ihop thing cos iflop sucks

[Mindy]

So what, now? iBee?

Our local IHOP's customer service has always been terrible while Applebee's has people standing in line for 30 minutes JUST to get a table because the food & service are excellent.

-gnaws on her chicken-

[Drtooth]

Originally Posted by Jamboree

Not an IHOP fan either. I also prefer fridays. But a billion dollars?! wow.

You know... I tried to eat at Fridays once, and the fries were so salty even I couldn't eat them.

[Buslady]

I think out of these joints, I prefer Red Robin. Endless fries....and the yummiest chicken tortilla soup...

[Brodie]

IHOP is awesome...stuffed french toast for the win.

And I never went to an IHOP that was over priced.

What mass amounts of food are you guys ordering that makes you say its overpriced??

I got the stuffed frenchtoast with the sampler thing (which isnt really a sampler, they just give you everything: bacon, sausage, ham eggs) for like maybe, MAYBE 8 bucks, and thats rounding up.

In comparison to Applebees who doesnt have anything under 8 bucks that isnt a drink.

[installerray]

ihop totally sucks.
if you want GOOD breakfast, its got to be perkins. or any jersey diner.
applebees is ok for middle of the road, its mcdonalds on steroids.

[VaughnMichael]

boy oh boy sounds like a food fights gonna start up in this motha soon!

[Raph's Girl]

There's 2 Ihops in the area they both have horrible service. The waiters are lazy as heck and the food is often meh.... Denny's however is always good.