Applebee’s: How High Will Someone Pay?

Applebee’s (APPB) is up 12.5% at $27.25 right after the open on word that it has hired Banc of America as financial advisors to explore strategic alternatives.  It has formed a special committee to explore a recapitalization or potential sale of the company.  This ‘may’ alter its previous guidance as well, so they have withdrawn 2007 guidance.

APPB shares have been somewhat of a zombie for the last 3 years, although they are already up now more than $10.00 from the lows over the last year.  Much of the gain was in hopes of a deal or something to the likes of what the company has announced this morning, so you really have to wonder just how much more juice there is left.  Depending on who is looking at it, there could be a lot more.  Someone else would say it is already fully reflective of the perceived value.

APPB’s balance sheet is actually OK for a company of its position and one that has to pay net-30, but its market cap is now back up to almost $2 Billion.  The valuation, not excluding the trailing 22 P/E ratio and forward 21 P/E ratio, just doesn’t scream value here.  When I ran the steakhouse break-ups I had already screened this one out because of values.  What I didn’t note additionally about why it was not included is that you have to wonder if any private equity guys would ever go eat at Applebee’s on their own.  Maybe they will, I haven’t been to one in a few years.  Unfortunately the reason was because it offered nothing unique and was 100% reminiscient of corporate food.

So it is understandable why the shares are higher on hopes of a deal, but anyone stepping in now needs to know they are $10.00 off the lows and are playing the "buy higher to hopefully sell even higher."  It is very possible that the verdict will come back that maybe the company needs to be explorinbg other acquisitions rather than a sale, but that will be for them to decide.  We don’t yet have the February short interest, but about 6 million shares of the float was short as of January.

Jon C. Ogg   
February 13, 2007