Reported bid for Applebee’s spurs skepticism
Pancake chain IHOP Corp. might be about to toss Applebee’s International Inc. onto its menu.
The Glendale-based breakfast house, which has been trolling for an acquisition for several years, reportedly has offered more than $2 billion for Applebee’s, a casual-dining restaurant chain.
Both chains declined to comment, and Wall Street industry analysts were skeptical. The offer was reported Wednesday by Bloomberg News with no other details.
“It seems like this would be an awfully big bite for IHOP,” said Michael Smith, an analyst with Oppenheimer & Co.
Smith, who follows both companies, noted that Applebee’s has a market value of close to $2 billion, more than double that of IHOP.
Moreover, the two chains have vastly different business strategies.
Applebee’s, based in Overland Park, Kan., owns 500 of its 1,900 restaurants; the rest are franchises. IHOP, by comparison, is primarily a franchisor and has little experience as a large restaurant operator, Smith said. It owns just 10 of its 1,306 locations.
However, Applebee’s fits several of IHOP Chief Executive Julia Stewart’s previously stated requirements for an acquisition target. It isn’t a competitor of the pancake house, it has size, and it has a concept that is franchised.
And before jumping to IHOP, Stewart was president of Applebee’s domestic division from 1998 to 2001.
In an April conference call with investors, Stewart said an “acquisition could be a viable growth avenue for our company. We have continued our acquisition evaluation process into 2007.” She did not identify any potential targets.
Previous IHOP efforts have been stymied by private equity groups that have bid up the price of restaurant chains. Stewart has said IHOP would make a purchase only if it makes economic sense for the chain.
The takeover report sent shares of the companies in opposite directions. IHOP dropped 19 cents to $56.61 while Applebee’s rose 97 cents to $25.77.
Applebee’s put itself on the block in February after years of lackluster performance. In May, its same-store sales fell 2.1%.
The company saw profit plunge 65% to $9.5 million from $27.2 million for the first quarter ended April 1. Sales were flat at $338 million.
Previously, the company has said it has received several preliminary proposals to acquire the chain. Applebee’s also confirmed that it had entered “a second round” of discussions and would ask potential buyers to submit definitive, binding proposals. But Applebee’s has not disclosed the names of the suitors. It also said it was evaluating other financial alternatives such as a stock recapitalization.
IHOP reported that profit slipped 10% to $11.3 million in the first quarter ended March 31. Revenue rose 2% to $90.1 million.
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