IHOP Corp. Chief Executive Julia Stewart said she plans to revive Applebee's International Inc. by better distinguishing the chain from competitors, remodeling its restaurants and selling hundreds of company-owned locations to franchisees.
Whether Ms. Stewart succeeds will mark a defining point in her career in the restaurant industry, following her success in improving IHOP's financial performance. After months of plotting to acquire a restaurant chain, IHOP announced yesterday it sealed a deal to buy Applebee's for about $2.1 billion, turning the company into the nation's largest sit-down restaurant chain by locations and sales, with a total of about 3,250 locations and sales of nearly $7 billion.
It is a bold move considering IHOP, a pancake-restaurant chain based in Glendale, Calif., has about half the market capitalization of Applebee's, of Overland Park, Kan. Some analysts question whether the deal does much to reward Applebee's shareholders. In the past year, Applebee's stock has traded higher than the $25.50-a-share purchase price. Since IHOP is buying the company with cash, Applebee's shareholders won't see any future benefit if Ms. Stewart succeeds.Applebee's put itself up for sale in February after investor Richard C. Breeden launched a campaign for board seats. Mr. Breeden, whose Breeden Partners LP hedge fund owns 5.25% of Applebee's shares, didn't respond to an interview request yesterday about the IHOP deal.
Ms. Stewart is trying to reassure skeptics by touting her record at the pancake chain. The 51-year-old started her restaurant career as an IHOP waitress when she was in high school. While studying marketing and communications at San Diego State University, she invented a "McDonald's Masher," which mashed a hamburger into the shape of the McDonald's Corp. arches, that landed her on the local TV news and eventually got her a job at an ad agency. After working in management at several restaurant chains, including Applebee's, she joined IHOP in 2001.
Ms. Stewart has reinvigorated the IHOP brand and improved its finances. A major part of her turnaround strategy was selling IHOP restaurants to franchisees, which increased the company's free cash flow and helped drive up its shares. Ms. Stewart says she thinks the same thing can help Applebee's. IHOP plans to sell most of Applebee's 508 company-owned restaurants and their underlying real estate during the next several years to pay down some acquisition debt.
The bigger challenge will be persuading people to start eating at Applebee's again. Ms. Stewart admits that Applebee's lost its focus and didn't change quickly enough in the last several years. "I don't think the taste buds are the same today," she said in an interview. "Consumers have very high expectations for flavor...they want a $20 meal for $12."
She said it is too soon to say exactly how she will change Applebee's but that the company needs to decide "what they want to stand for" and then "go after that with a vengeance." She anticipates a remodeling for Applebee's restaurants and says "the brand work is going to take a while."
The way that IHOP is structuring the acquisition suggests that the company is thinking like a private-equity firm, says Jeffrey Bronchick, chief investment officer at Los Angeles money-management firm Reed, Conner & Birdwell LLC, which owns IHOP shares. Private-equity firms use debt backed by the assets of the companies they target to fund their purchases. What IHOP is doing isn't that different. "Essentially, it's doing a debt-for-equity trade," says Mr. Bronchick.
The deal comes as midpriced sit-down restaurants are trying to pull out of one of the industry's worst slumps in several years and are trying to set themselves apart amid a glut of competition.
Ms. Stewart says she doesn't believe the pessimists who say casual-dining chains like Applebee's can no longer succeed, partly because she proved some people wrong when they warned her that IHOP was a dying brand.
"I don't buy it," she said. "There are always exceptions to the rule."
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