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IHOP in Buyout Play for Applebee's

Hoping to duplicate its successful transformation into a major franchise brand, IHOP Corp. is using familiar securitization techniques to finance its $2.1 billion buyout and subsequent revamping of Applebee's International.

IHOP announced its intention to merge with Applebee's last Monday and said it would finance the all-cash transaction through a whole-business securitization backed by Applebee's assets. IHOP also plans to raise another $175 million under its securitization structure to contribute capital to the deal, said Tom Conforte, IHOP's CFO. Lehman Brothers will act as sole structuring adviser and sole underwriter for both transactions.

The securitizations are the second part of a three-step financing to take over Applebee's. First, IHOP plans to get a bridge loan, which will be taken out through the securitizations. After the acquisition closes - which is expected to come in the fourth quarter - IHOP will place preferred stock privately.

After the major transactions are settled, IHOP expects the combined company to emerge as a stronger franchise operator, with more than 3,250 restaurants generating more than $6 billion in sales, said Julia Stewart, IHOP's chairwoman and CEO, during a conference call on Monday.

The plan is to transform Applebee's from a restaurant owner/operator to predominately a franchiser, Stewart said. Currently, Applebee's has 508 company-operated restaurants. By contrast, more than 99% of IHOP's 1,319 restaurants are owned and operated by franchisees, which has allowed the company to achieve significant cost savings over time.

In addition to franchising, IHOP plans to undertake several sale-leaseback transactions of real estate assets. In such a transaction, IHOP would sell the property to a third party, then lease the same property back from the acquirer. "We expect the two initiatives to raise significant cash, as much as $950 million over a three-year period," Conforte said.

IHOP officials also said that the two transactions will replicate its own successful refranchising effort of several years ago.

"We believe the Applebee's brand is strong, and it possesses compelling opportunities, which can be unlocked with a comprehensive approach to revitalizing all aspects of the business," Stewart said.

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