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IHOP makes bid for Applebee’s

Boosting franchises in bar-and-grill chain is advocated

July 17, 2007

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— 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 are expected to cut costs by $50 million a year by 2011, would reduce the company's risks in owning real estate.

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

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. It remains to be seen whether Applebee's shareholders, including Breeden's firm, will endorse the deal.

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

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 also is assuming about $155 million in Applebee's debt, 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.

Applebee's, based in Overland Park, has 1,943 restaurants worldwide, including two in Lawrence. Virtually all of Glendale, Calif.-based IHOP's 1,319 restaurants are now owned by franchisees. Lawrence has one IHOP location.

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