California-based DineEquity Inc. (DIN) recently announced that it has inked a deal with Apple American Group LLC to sell 66 company-owned Applebee’s restaurants in New England and parts of New York. The financial proceeds from the deal is expected to be $49 million. The company intends to reduce its financial obligations and shift toward a franchise-based model through this deal. The transaction is expected to close in the third quarter of 2011.
Apple American, the largest franchisee in the Applebee’s system, has also agreed to renovate all Applebee’s restaurants in New England by the end of 2012, as per the company’s revitalization program.
During the first quarter, DineEquity completed the sale of 65 company-operated Applebee’s restaurants in St. Louis, Missouri and in some areas of Illinois and Washington, D.C, in line with the company’s strategy of becoming highly franchised.
Following the footsteps of other noted restaurant companies in the U.S., DineEquity is also shifting its focus toward franchised operations from company-owned restaurants as a de-risking strategy, given that expansion through franchising is less capital intensive and income is fixed in the form of fee.
DineEquity acquired Applebee’s International in November 2007 in a $2 billion leveraged buyout. Since then, the company has sold a total of 258 Applebee’s company-operated restaurants.
The sale of company-owned Applebee’s restaurants has reduced the debt burden of the company considerably by the use of free cash flow. As of March 31, 2011, the company’s long-term debt liability was $1,485.9 million compared with $1,631.5 million as of December 31, 2010. During the quarter, the company reduced its total debt burden by 8.8%.
At the end of the first quarter, more than 90% of DineEquity’s Applebee’s and IHOP restaurants were franchised. Upon completion of the pending sale, this percentage will rise to 95%. Although DineEquity’s transition to a more franchise-based model will decrease company-owned revenues, this will enhance free cash flow generation by reducing capital employed.
For fiscal 2011, Applebee’s franchise plans to open 24 to 28 restaurants, half of which are expected to open in the international market.
With more than 3,500 Applebee’s and IHOP restaurants combined, DineEquity is the largest full-service restaurant company in the world with brands leading in their respective categories of casual and family dining.
DineEquity’s primary competitors are Brinker International Inc. (EAT) and Denny’s Corporation (DENN).
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