IHOP to buy Applebee's for $1.9 bln
NEW YORK (Reuters) - IHOP Corp. IHP.N said on Monday it plans to buy bar-and-grill chain Applebee's International Inc. APPB.O for $25.50 per share to expand beyond its iconic pancake houses, sending IHOP's shares up as much as 12 percent to an all-time high.
The all-cash deal, which represents a 4.6 percent premium to Applebee's closing price on Friday, is worth about $1.9 billion, based on the company's 75,072,000 shares outstanding as of April 1.
A source close to the deal said it included about $155 million in debt, bringing the total value to $2.1 billion, the figure cited by the companies.
Excluding one-time charges, IHOP expects the transaction to add to earnings beginning in 2008.
IHOP, with its market capitalization of $980.6 million, according to Reuters data, is using securitized debt backed mostly by Applebee's assets to fund the purchase of the much larger company, whose market value is $1.82 billion.
The pancake chain, which franchises almost all of its restaurants, said it believes it can cut costs and re-energize the struggling bar-and-grill chain by franchising most of the 508 restaurants Applebee's still owns. It is aiming to sell the restaurants to franchisees at a rate of 40 per quarter starting in 2008.
Applebee's, whose shares rose 2 percent, already has about 1,400 franchised restaurants.
"We will fundamentally change (Applebee's) business model, moving it nearly completely out of the role of owner/operator to one that is predominantly a franchisor," said IHOP Chief Executive Julia Stewart, a former Applebee's president.
"In doing so, we believe over time we will create a business model with a lower-risk profile and superior cash-flow characteristics."
IHOP said it also plans to sell and then lease back Applebee's real estate. It expects these sale lease-back transactions and the franchising of the company-owned restaurants to generate as much as $950 million in cash over a three-year period, which it will use to pay down the debt.
FAIR PRICE
Morgan Keegan analyst Bob Derrington said the purchase price was within his fair value estimate for Applebee's. At 10 times trailing earnings before interest, taxes, depreciation and amortization, he said it was in line with the multiple recently paid for the Outback Steakhouse chain.
Applebee's has been hit hard by weakened consumer spending and stiff competition from rivals, as well as efforts by grocery stores to sell more prepared meals.
IHOP said it believes sales at restaurants open at least 18 months, a closely watched metric, can increase 2 percent to 3 percent a year once its plan is in place. In the latest quarter same-store sales fell 4 percent due to sluggish customer traffic.
Derrington said Stewart's good track record at IHOP earned her the benefit of the doubt, but he was cautious about the probability of success. Continued...
