IHOP's $2B takeover of twice-its-size Applebee's created Dine Brands (interview)

In a CNBC Make It interview, former IHOP CEO Julia Stewart recalls the 2007 decision to buy Applebee's — a languishing chain roughly twice IHOP's size — and take on about $2B in debt. She says the trigger was success itself: the franchising model she installed at IHOP made the company so cash-rich that she feared 'an unfriendly takeover', and she went to the board saying 'We've got to buy something.' Then she read a Wall Street Journal front-page story that Applebee's was considering strategic alternatives.

Stewart says she knew the target cold — she had spent three years as Applebee's president and had run part of its turnaround before being passed over for its CEO job. She says the team vetted the deal 'six ways from Tuesday' with an 'Armageddon' stress case, and she kept the deal team from falling in love with the asset. Two months in, due diligence found that 75% of IHOP's products came from the same distributors as Applebee's; the companies formed a purchasing co-op that consolidated distribution centers and SKUs and, she says, 'saved millions and millions of dollars for the franchisees.'

The 2008 financial crisis cut the stock to $6 a share, but she told her board the debt had been stress-tested so that even double-digit sales declines would keep the company comfortably in compliance with its covenants. She says nearly $1.1B of the acquisition debt was paid off within five years (self-reported in the interview), and she led both brands for a decade before resigning in 2017 amid flagging Applebee's sales. Per CNBC, Dine Brands — the parent company created in the deal — today has more than 3,500 restaurants.

Nearly $1.1B of the $2B deal debt repaid within five years (self-reported in the interview); Dine Brands, created in the deal, has 3,500+ restaurants today

A cash-rich small franchisor is a takeover target: putting capital to work preempted a hostile bid, Stewart says.

Stewart's three years running Applebee's meant the $2B bet was priced on insider knowledge of the target's economics, not hope.

The 'Armageddon' stress case kept the debt load survivable through the 2008 crash without panic.

Due diligence surfaced the 75% distributor overlap, which became a purchasing co-op that consolidated SKUs and saved franchisees millions.

Size is a financing problem, not a prerequisite: a cash-generative franchisor can buy a chain twice its size when it knows the target's economics cold — and which synergies to test.

Stewart ran the combined company for a decade and resigned in 2017 as Applebee's sales flagged (the separate 2017-18 Applebee brand turnaround is already covered in this archive). The 2008 crisis cut the stock to $6, but the debt stayed within covenants and the company kept buying back its debt. Dine Brands, the parent created in the deal, counts more than 3,500 restaurants and a market value north of $600M today, per CNBC. Asked whether the deal was right, Stewart says she would 'do the same thing all over again'.