Web Exclusive: IHOP Buys Applebee’s: A Look at the Numbers
IHOP borrows heavily to acquire Applebee’s in an all-cash deal worth $2.1 billion.
By David Farkas, Senior Editor -- Chain Leader, 7/17/2007
IHOP Corp. startled Wall Street Monday by announcing the acquisition of struggling Applebee’s International, the nation’s largest casual-dining chain, for $25.50 a share in an all-cash deal worth $2.1 billion. The price represents a slight premium to the $24.10 a share Applebee’s was worth Monday on the Nasdaq Stock Market. IHOP’s stock rose 9 percent on the news, to $61.24.
In a conference call with analysts early Monday morning, IHOP CFO Tom Comforti said he expected to close the transaction and securitized debts, worth some $2.1 billion, in about three months. He added that a “committed” bridge loan was in place should the financing take longer than the merger itself.During the call an analyst wondered why IHOP used securitized debt when other less-restrictive forms for capital are available. “We are familiar with securitized structure and we like it,” Comforti explained. “It gives us the ability to maximize borrowings at lowest cost possible.”
In an interview with Chain Leader, Comforti conceded a company with IHOP’s $1 billion market capitalization would have trouble raising a $2 billion purchase price. As a result, IHOP used Applebee’s assets to secure roughly $1.8 billion.
“We’ve taken a great cash flow from Applebee’s business, and we are leveraging it to be able to finance this transactions,” he explained.
To help repay the loans, backed primarily by Applebee’s assets, Comforti said IHOP is counting on sale-leaseback transactions of Applebee’s 508 company units to raise about $400 million. Those restaurants will eventually be franchised, raising another $550 million, according to IHOP models. Comforti estimates that such scenarios could reduce IHOP’s debt-to-EBITADAR ratio to 6 times by late 2009.
Former restaurant analyst Craig Weichmann, now a Dallas-based investment adviser, cautioned that such a future may well depend on the lease deals franchisees cut after the leaseback transaction. “You want to leave a lease that still gives franchisees a bottom line,” he says. “You don’t want to squeeze all the juice out.”
Comforti expects he will have to defend his financial assumptions. “I will get tons of feedback from people with opinions on this,” he says.
The Challenge Ahead
The deal is a big bet for the Glendale, Calif.-based pancake chain. Applebee’s, which franchises and operates some 2,000 restaurants vs. IHOP’s 1,300, reported all-important same-store sales slumped 1 percent in the second quarter; year-to-date same-store sales are down 2.5 percent at Applebee’s. IHOP reported a 2.5 percent gain for the second quarter.
Industry observers have criticized the Overland Park, Kan.-based bar-and-grill chain for being largely indistinguishable from competitors, who are also accused of sameness in terms of menu offerings and store design.
In January activist shareholder and former SEC Chairman Richard Breeden insisted in a public letter to the board of directors that Applebee’s pursue “strategic alternatives.”
Asked how Applebee’s might improve sales, IHOP CEO Julia Stewart explained the solution was “a crystal clear” understanding of all aspects of the brand. “Which is what we did at IHOP,” she added. IHOP has enjoyed a mostly steady run of positive same-store-sales gains since Stewart, a former president of Applebee’s, was appointed CEO in 2002.
Stewart promised to explain the transaction in more detail during the company’s next scheduled conference call on July 25.
For more restaurant analysts’ opinions on the acquisition, read “Should IHOP Pursue an Acquisition of Applebee’s?”
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