DineEquity Gains on Shrinking Applebee's
NEW YORK (
) --
DineEquity
(DIN) - Get Report
shares jumped on Monday after the IHOP operator announced it would sell 56 of its Applebee's restaurants.
DineEquity shares gained 3.2% to trade at $48.22 at midday. Volume was only slightly higher than average but investors clearly liked the idea of a smaller portfolio of restaurants and the after-tax benefits expected from the deals.
DineEquity will sell 56 company-owned Applebee's restaurants as part of the restaurant operator's shift toward a more franchised model of operations. As of June 30, more than 88% of DineEquity's Applebee's and IHOP restaurants were franchised, the company said. After the completion of pending sales of 119 company-operated Applebee's restaurants mentioned in the company's announcement, 92% of its portfolio of restaurants will be franchised.
The sale of Missouri-, Illinois- and Virginia-based locations should bring in approximately $38 million in after-tax benefits, the company said, as it works to pay down debt.
DineEquity, formerly called IHOP, bought Applebee's in a leverage buyout nearly three years ago. The company changed its name from IHOP to DineEquity after that deal.
The timing of the Applebee's acquisition in late 2007 and its price of $2.1 billion proved to be something of a mistake. As a result, the combined company is saddled with way too much debt.
To DineEquity's credit, the chain restaurant operator has managed to cut down that debt from $2.4 billion at the end of fiscal-year 2007 to $1.7 billion at the end of June 2010. Diners are returning to casual dining establishments as the economy improves, helping out the Applebee's business. IHOP continued to increase customer awareness with its annual National Pancake Day promotion and it's IHOP Kids Eat Free promotion in August.
In the second quarter of 2010, DineEquity reported earnings of 90 cents per share, which fell short of consensus estimates for 96 cents, but in mid-September, management provided an upbeat preview of its third-quarter results, noting improving sales trends. Analysts currently expect DineEquity to grow earnings by 33% to 73 cents per share for the current quarter.
Overall DineEquity may be improving, but the stock is too richly priced, it delivers uneven results, and growth will be thwarted by the debt overhang, according to
RealMoney
contributor and founder of LakeView Asset Management
Scott Rothbort
.
>>Do These Breakfast Stocks Serve Up a Profit?
Mid Rover Restaurants
will acquire 36 of the restaurants, in St. Louis and parts of Illinois, for about $26 million in post-tax proceeds. The deal should close in the first quarter and is likely to reduce sale-leaseback related financing obligations by $11 million.
Apple Investors Group
will buy the other 20 restaurants, in the Roanoke and Lynchburg, Va. markets, for about $12 million in after-tax proceeds. That deal should reduce sale-leaseback related financing obligations by about $15 million.
Mid River, an affiliate of
Southern River Restaurants
, was founded in 2000 to acquire 12 Applebee's restaurants in Louisiana. Co-founder Frank Heath also owns 26
Hardee's
(CKR)
restaurants; Co-founder David Paradise also owns 10
Taco Bell
(YUM) - Get Report
restaurants and 12 IHOP restaurants.
Separately, DineEquity said Friday it signed a new $950 million senior secured credit agreement, with permission to increase the amount by up to $250 million.
-- Written by Miriam Marcus Reimer in New York.
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