OVERLAND PARK Kan. Applebee’s International Inc. said it has formed a committee of independent directors to explore the possibility of selling the company or pursuing other “strategic alternatives,” including a recapitalization.
The news comes just four months after activist investor Breeden Partners, a 5-percent stakeholder in the casual-dining giant, had begun to pressure Applebee’s to improve shareholder returns through re-franchising, cuts in spending and the sale or sale-leaseback of real estate assets. Gains from the sale of refranchised units and the sale or sale-leaseback of assets would be used to repurchase a sizeable amount of shares, Breeden had suggested.
Indeed, a large share buyback funded through debt is one scenario analysts have predicted as a front runner to Applebee’s exploration of alternatives to improve share price.
“Most likely, the outcome here is a Dutch auction tender where they take on new debt and buyback a large amount of shares,” securities analyst Ashley Woodruff at Friedman, Billings, Ramsey, & Co. Inc. in New York said in an interview.
Woodruff said a sale of the company is unlikely, as its current stock price has been trading at more than 10 times its projected fiscal 2007 earnings before interest, tax, deprecation and amortization, or EBITDA. Recent valuations of restaurant companies being acquired have been between nine and 10 times EBITDA.
In a sale, the buyer “won’t get much upside from where the stock is now,” Woodruff said.
If there were to be a sale of giant Applebee’s, which operates or franchises 1,942 restaurants, a strategic buyer is very unlikely, Woodruff contends. A large private-equity buyout, the like of which OSI Restaurant Partners Inc. is currently undertaking would be the most likely option, she and others observed. Applebee’s current market capitalization is more than $2 billion.
Applebee’s said its exploration of alternatives does not guarantee that a transaction will occur. The company also said it does not plan to further discuss developments until the committee has completed its review.
In a statement, Breeden said it was "pleased that the board has recognized the need to do something in the face of a failed strategy."
"We hope the company will not contemplate using this announcement as a pretext to delay the annual meeting or to entertain a sale of the company at valuations reflecting current depressed EBITDA levels," the fund addeduters.
Breeden had said in December it would nominate four members to Applebee's 12-member board of directors at the company's annual shareholder meeting, which was slated for May.
At the time, Breeden said Applebee's declining same-store sales, increased capital expenditures and a 14.5-percent drop in stock price for the three years ended Dec. 1, showcased the need for "fresh thinking, financial discipline and new leadership."
Applebee's announcement came a day before the company was scheduled to release its financial results for the fourth quarter of 2006. Its conference call is still slated for Thursday morning, but analysts and observers indicate the company is unlikely to discuss its latest announcement then.
Applebee's has been struggling to recover the stride that made it one of the industry’s out-performers through much of the 1990s and first half of this decade. More recently, the brand has been unable to pull out of a sales slowdown. For the four weeks ended Jan. 28, same-store sales fell 5.8 percent.
News of a possible sale accomplished what Applebee's management has been unable to do through such efforts as enlisting celebrity chef Tyler Florence to develop new entrees, or offering a value-oriented three-item combo deal for $9.99. In the wake of the announcement, Applebee's share price hit a 52-week high of $27.32 before closing at $26.32, up about 9 percent.
Casual-dining's largest chain said a sale, refinancing or other major strategic move could change its financial outlook. As a result, it said, the company would no longer provide financial analysts and shareholders with the forward-looking “guidance” typically used by investors to shape their decisions to buy, sell or hold shares.
Applebee’s move also could have implications for other casual-dining companies, analysts said. Activist investors could begin to pressure some, like Brinker International Inc., Ruby Tuesday Inc., and even Red Robin Gourmet Burgers Inc. to further refranchising efforts or consider recapitalizations.
“This is a good thing, financially and competitively,” securities analyst John S. Glass at CIBC World Markets in Boston, said in a note to clients. “Financially, it increases pressure on companies...Competitively, [casual-dining peers] now have a distracted competitor.”
Glass upgraded shares of Ruby Tuesday on Tuesday after Applebee’s latest news.
The committee hired Citigroup Global Markets Inc. and the company has hired Banc of America Securities for financial advice.
