DineEquity (DIN), owner and operator of restaurant concepts Applebee’s and IHOP, is a special situation company that, through a leveraged buyout of Applebee’s which resulted in refranchising and selling assets to pay down debt, is set to return capital from its large free cash flow to shareholders via dividends and share repurchases, says Bryan C. Elliott, Senior Equity Analyst with Raymond James & Associates, Inc.
“It was a rare opportunity for public investors to invest in an LBO structure. IHOP, which had very nice high free cash flow and modestly growing business…essentially did a leveraged buyout of Applebee’s, a company substantially larger. It borrowed $2.2 billion to buy Applebee’s. It then refranchised a number of markets, did asset sales to help pay down debt. Free cash flow is now running in the $5 to $6 per share range and should be pushing the $7 level soon,” Elliott said.
DineEquity is now in an end state where it’s employing a 99% franchise business model of both IHOP and Applebee’s brands, and with this asset-light business model, DIN is primed to return cash to shareholders, says Elliott.
“There are no capital expenditure claims of any magnitude on the cash flow of the business; if they can maintain the health of the brands, that’s a very solid business model. We think in 2013, the company will begin to return some free cash flow to shareholders, probably in the form of a steady cash dividend and some share repurchases,” Elliott said.
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