IHOP Serves Up a Tall Stack of Debt

IHOP announced on Monday morning that it will gobble up Applebee's in a deal worth $2.1 billion- but is its appetite as big as its eyes?

The pancake giant will buy America's largest sit-down restaurant chain for the low, low price of $25.50 a share, a 4.6 percent premium to Friday's closing price but below the company's 52-week high of $29.10.

But bargain or no bargain, the $1.9 billion in cash that IHOP will have to put up for the acquisition will still result in a tall-stack of debt for a company with a market cap just under $1 billion.

IHOP certainly has its work cut out for it. The most recent bout of press for the bar and grill chain concerned an Applebee's employee mistakenly serving a toddler a margarita in a sippy cup.

But it was investors' grumbling over Applebee's abysmal financial performance that was the impetus behind the company putting itself on the block in February. Richard Breeden, an activist hedge fund manager and a former S.E.C. chairman, spearheaded the push for a sale.

IHOP, which has been a consistently strong performer on the casual dining landscape, believes that by applying some of the same techniques to Applebee's that have spelled success for the plucky pancake chain - such as tighter cost control and a snazzy new marketing campaign - they'll be able to pay down debt and pull Applebee's back into profitability before they themselves get dragged under.

IHOP operates entirely on a franchise model, and also plans to free up cash by selling most of the 500 Applebee's restaurants that are still owned by the company.

The casual dining sector is an unforgiving industry, overwhelmed by competitors and wounded by the sluggish consumer spending climate. Up to this point Applebee's stock has been on a steady downwards spiral while rivals such as Darden's Red Lobster and Apple Garden have seen profits soar.

But IHOP has come hungry, and hopefully it will leave happy.

by Liz Gunnison

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