Pancake house IHOP Corp. ordered up a large feast on Monday when it announced its $1.9 billion acquisition of bar-and-grill chain Applebee’s International Inc.  –  a company nearly twice its size. 

IHOP, which has a market capitalization of about $980.6 million, will use securitized debt backed mostly by Applebee’s restaurant and real estate assets to fund the purchase of the much larger company, whose market value is $1.82 billion.

IHOP, which franchises 99 percent of its 1,319 restaurants, plans to revamp Applebee’s business model away from owning and operating its own restaurants to becoming predominantly a franchisor. Applebee’s has nearly 2,000 restaurants, of which 508 were company-owned. 

“The value is in the restaurants and the real estate. You’ve seen this play in Sears-Kmart, Toys R Us and elsewhere. The companies may have problems, but the land they are sitting on still has value and the brand names still have value that can be leveraged,” said one consumer investment banker who declined to be named.

Applebee’s, which has been under shareholder pressure to improve its stock price, said earlier this year it was reviewing its options. The company has struggled amid weak consumer spending, higher gas prices that siphon away consumers’ disposable income, as well as stiff competition from rivals and grocery stores that are selling more prepared meals.

“While the sale price (of Applebee’s) is somewhat less than we expected, it does illustrate value of franchised businesses with tools such as securitized lending, refranchising and G&A (general and administrative) reductions that are available,” said UBS Equity Research analyst David Palmer. 

“Importantly, the 9-tmes forward EBITDA (earnings before interest, taxes, depreciation and amortization) price highlights the value of a franchised business with owned real estateeven one with long-term issues like (Applebee’s),” Palmer said.

Other companies such as pizza-delivery chain Dominos Pizza Inc. have recapitalized on their own. Palmer suggested that Brinker International, which owns Chili’s Grill & Bar, could help its stock price by following IHOP’s plans for Applebee’s.
 
(Photo credit: IHOP website)