IHOP to Acquire Applebee's


Jul 16, 2007

IHOP and Applebee's recently announced an agreement under which IHOP will acquire Applebee's International, Inc. ('Applebee's') for $25.50 per share in cash. The total transaction will have an estimated value of $2.1 billion.

IHOP has successfully re-energized its nearly 50-year old brand over the last five years, while transforming itself into a pure-play franchisor with more than 99% of its 1,319 restaurant system owned and operated by franchisees. The company believes that it can employ similar strategies to transform and re-energize Applebee's.

IHOP expects to realize significant cost savings as a result of its intention to franchise a substantial majority of Applebee's 508 company-operated restaurants. Management will also begin focusing on driving marketing and operational improvements aimed at re-energizing Applebee's system performance. These changes are expected to result in significant and increasing cash flow over time, which will be used to initially reduce debt incurred in connection with the acquisition. Once debt levels are reduced, IHOP intends to return to its long-term commitment of returning cash to its shareholders through share repurchases. At present, IHOP expects to continue quarterly dividend payments at the discretion of its Board of Directors.

Julia Stewart, IHOP Chairman and CEO, who will lead the management team of the combined Company, said, 'Over the past year and a half, we have been evaluating alternatives that would allow us to leverage IHOP's proven competencies in order to create additional long-term value for shareholders, including a potential acquisition. Applebee's meets all of our acquisition criteria and we expect the combination to generate significant additional value for our shareholders.' 

The transaction is expected to result in earnings accretion, exclusive of one-time transaction-related charges, in 2008 and beyond. The acquisition of Applebee's is also expected to substantially enhance IHOP's cash generating profile. Following the closing of the transaction, IHOP intends to utilize cash to reduce debt to a specified level and thereafter return cash to shareholders. The following initiatives are expected to generate increased cash flow in the combined entity:

• Franchising the majority of Applebee's 508 company-owned and operated restaurants;

• Reducing related General & Administrative expenses as those restaurants are franchised;

• Selling Applebee's-owned real estate and executing related leasebacks;

• Reducing capital expenditures as Applebee's is transitioned quickly out of its more capital intensive company operations model; and

• Re-energizing Applebee's brand, driving same-store sales performance and improving the system's operational performance and profitability.