The firm says IHOP would have more value as separate entity.
Dine Brands Global, parent of Applebee’s and IHOP, disclosed Thursday that it will vote on whether to spin off IHOP during its annual meeting of stockholders on May 12.
In the SEC filing, the company lists agenda items, including a proposal from activist investment firm JCP Investment Partnership “requesting that the Board of Directors engage an investment banking firm to effectuate a spin-off of the Corporation’s IHOP business unit, if properly presented.”
Essentially, JCP believes IHOP would perform better if it operated separately because it’s not compatible with Applebee’s.
In its supporting statement, JCP said the market significantly undervalues Dine Brands Global because Applebee’s and IHOP have “vastly different growth opportunities.” The company backs up the claim by noting IHOP has outpaced Applebee’s in comp sales and net unit growth in the past five years.
“Based on its performance metrics, we believe that a standalone IHOP would be valued and classified as a growth company, which would allow IHOP to trade at a materially higher multiple than the company currently trades,” JCP said in a statement.
“Separating the IHOP and Applebee’s businesses would allow the market to value each business as a “pure play” in line with peer trading multiples in their respective sectors and allow the respective management teams to focus on each company’s growth,” the firm added. “We believe that the valuation increase and potential earnings increase for IHOP would vastly outweigh the existing synergies associated with keeping IHOP and Applebee’s together.”
In Q4, IHOP’s same-store sales at U.S. stores increased 1.1 percent, while Applebee’s U.S. comps slid 2.5 percent. In 2019 overall, IHOP grew 1.1 percent, and Applebee’s fell 0.7 percent. IHOP has seen eight straight quarters of positive growth while Applebee’s has reported three consecutive quarters in the red. In 2019, IHOP opened a net of 10 restaurants while Applebee’s closed a net of 50 units.
As part of its argument, JCP pointed to other successful spin offs, such as Brinker International’s sale of On the Border and Darden Restaurants’ sale of Red Lobster. JCP said IHOP as a separately traded public company “could create significant stockholder value.”
Dine Brands recommended shareholders vote against selling the brand.
In its response, Dine Brands said it remains open to considering alternatives to generate stockholder value, but it believes a spin-off would “materially affect the company’s ability to continue engaging in share repurchases and dividends at current levels.”
The brand also said choosing to specifically use an investment bank prevents Dine Brands from seeking multiple options to maximize stockholder value.
“The Board believes it is not in the best long-term interests of stockholders to limit the Board’s flexibility in making decisions regarding the optimal business portfolio and capital allocation policy of the Company,” Dine Brands said in a statement. “The Board will continue to evaluate the company’s strategy and structure on a regular basis to ensure it is well-positioned to create value for stockholders for the future, including the consideration of a spin-off of IHOP.”