GLENDALE Calif. IHOP Corp. said Thursday that it has completed its acquisition of Applebee’s International Inc. for $25.50 per share in cash, or about $1.9 billion. The total value of the transaction comes to about $2.3 billion because of the assumption of Applebee’s debt and the transaction fees IHOP will pay.
As previously reported, IHOP plans to sell most of Applebee’s company-run restaurants to franchisees, cut costs and complete sale-leaseback transactions on corporately owned real estate assets. IHOP did detail for the first time that it planned to sell 475 of Applebee’s 510 corporate locations by the end of 2010. Select markets could be sold by early next year, the company added. Sale-leasebacks of Applebee’s-owned real estate assets are also under way, the company said, and those deals are expected to close early next year.
The acquisition makes IHOP one of the industry’s largest franchisors of full-service restaurants. Nearly all of IHOP’s 1,323 namesake restaurants are franchised, and about 1,400 Applebee’s units are franchised.
“We believe that [IHOP’s] core competencies of re-energizing restaurant brands, franchising and expense management are ideally suited to improve Applebee’s overall brand and financial health,” Julia A. Stewart, chairman and CEO of IHOP, and the leader of the now combined entities, said in a statement. “We look forward to applying the same focus and discipline that we have employed successfully at IHOP over the last several years to generate meaningful and sustainable improvements within the Applebee’s business.”
IHOP financed the acquisition through two separate securitized debt offerings that totaled about $2.04 billion — one collateralized by IHOP’s restaurant assets and future franchisee royalties and another by Applebee’s assets and future royalties.
The Applebee’s securitization totaled about $1.79 billion and consisted of four classes of fixed-rate notes and a revolving credit facility of variable funding notes. IHOP completed its third series of securitized financing, totaling $245 million of fixed-rate notes. In April, IHOP had completed a $200 million securitization transaction.
From the July announcement of IHOP’s intent to acquire Applebee’s through today’s closing, there was growing speculation among financial market observers that IHOP would be forced to use its pre-arranged bridge loan to finance the deal, as the credit crunch would delay the securitizations. It was assumed that IHOP would not get favorable terms for its debt, and would wait for the credit markets to settle before arranging its securitizations.
When Domino’s Pizza Inc. completed its $1.85 billion securitized debt facility in April, the company cited an interest rate of 6.19 percent. Darden Restaurants Inc. did not use a securitized debt facility to fund its acquisition of Rare Hospitality, but it did sell $1.15 billion in notes, with interest rates ranging between 5.6 percent and 6.8 percent. That financing was arranged in October.
According to IHOP’s statement, the average effective interest rate for its securitized notes is about 7.18 percent. That rate does not take into account the company’s interest rate swap transaction -- a hedging technique -- that the company completed in the third quarter of this year. The rate swap settlement will lead to interest expense of $26.5 million in the current fourth quarter of this year, IHOP said, and an additional $61.9 million in interest expense that will be amortized over the expected five-year life of the notes.
Because of financing costs for the securitization and because of the settlement of the interest rate swap, IHOP said it no longer expects the deal to add to fiscal 2008 earnings, as it had previously projected.
In addition to the securitized financing, IHOP completed a private placement of $190 million of non-convertible preferred stock and $35 million of convertible preferred stock, the company reported.
