IHOP agrees to acquire Applebee's for about $1.9B

GLENDALE, Calif. -- IHOP Corp., best known for its blue-roofed pancake restaurants, said Monday it has agreed to buy the bar-and-grill chain Applebee's International Inc. for about $1.9 billion in cash.

The move comes as Wall Street analysts are expecting a difficult second-quarter earnings season in the restaurant sector as soaring commodity costs are hurting restaurant profits and consumers facing high gas prices are thinking twice about going out for a meal.

IHOP chief executive Julia Stewart, a former Applebee's executive, said once the deal closes, IHOP would revive the Applebee's brand and plans to turn it into primarily a franchisor by selling most of the 500 company-owned stores at a rate of 40 per quarter, a process that could take until 2010 to complete.

"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 could save $50 million per year by 2011. 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.

Under the deal, IHOP will pay $25.50 per share for Applebee's, which has been under pressure from shareholders for a slumping performance. The price being offered is a 4.6 percent premium over Applebee's closing price on Friday.

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

Applebee's shares rose 43 cents, or 1.8 percent, to $24.81 in morning trading Monday. In an unusual move for the shares of a buyer, IHOP stock gained even more, rising $4.89, or 8.7 percent, to $61.14 after briefly reaching a new 52-week high of $63.39.

IHOP is funding the transaction through about $2 billion 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 on Overland Park, Kan., has 1,943 restaurants overall worldwide, including those operated by company and by franchisees.

But same-store sales are down more sharply this year for Applebee's company-owned restaurants than for its franchise locations.

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

In April, Applebee's struck a deal with Richard Breeden, an investor and former chairman of the Securities and Exchange Commission, to add him and one other person to its board, amid pressure from Breeden's firm to improve 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," Stewart said. "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."

The companies expect the deal will close in the fourth quarter pending approval by Applebee's shareholders and regulators. Combined, the company would have 3,250 restaurants and $6.8 billion in annual sales.

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.

The restaurant sector was expecting hard times, according to analysts.

As consumers worry about a soft housing market and rising gas prices, they are less willing to pay for a night out, analysts say. Meanwhile, the cost of everything from milk to beef steadily climbed.

Labor costs also will be taking their toll on restaurant businesses as minimum wage hikes take effect in a number of states and at the federal level.