IHOP’s Thomas Conforti: The Right Mix

The week that IHOP acquired Applebee's in a $2 billion deal, finance chief Tom Conforti talked to CFO about why the target company's business model is a thing of the past, and what it's like to swallow an elephant.

The Web version of this article has been expanded to include additional material that did not appear in the September print edition of CFO magazine.

It was the end of a brutal week for IHOP International’s Thomas Conforti, and the CFO wanted to steal away to indulge in some comfort food before heading back to the company’s Glendale, California, headquarters. Earlier that week, on July 16, IHOP announced it would buy the substantially larger Applebee’s International in an all-cash deal worth $2.1 billion. The announcement sent Conforti, CEO Julia Stewart, and other executives through a gauntlet of press, investor, and merger-related meetings. “We were so hungry [when we got back] that we didn’t want to go the office until we went to IHOP. I had a simple omelet and a corn-cake pancake — it tastes like cornbread, and with maple syrup, it’s outstanding,” recalls the finance chief.

Conforti, 48, will likely need a few more of his favorite pancakes to tide him over before the deal is finalized. If the merger is approved by Applebee’s shareholders, and Conforti is able to complete the financing as expected, the deal could close as soon as mid-October. Then he and his colleagues will begin the heavy lifting that will ultimately transform Applebee’s from a staid casual-dining chain into an intellectual property (IP) growth engine.

Conforti sat down with CFO to discuss why IHOP intends to abandon Applebee’s business model, how it will use the chain’s balance sheet to seal the deal, and what it’s like digesting a much larger company.

Before joining IHOP in 2002, you were a divisional CFO at Disney, responsible for its $20 billion retail business. What convinced you to move to a franchise-restaurant business that generates about $2 billion a year?

It was clear that [IHOP management] was going to completely change the direction of the business. And during my first week, I was part of a team that presented the board with a plan that said the old way of doing business had to be revisited. At the same time, our largest shareholder, Southeast Asset Management, had filed a Form 13D [shareholder resolution] expressing a desire to have the company consider different business models. We spent the next three weeks preparing a case that said our old franchising business model — which was balance sheet–intensive — needed to be abandoned.

Applebee’s is bigger than IHOP in terms of revenue (36 percent), cash flow (70 percent), market capitalization (40 percent), and retail units (33 percent) — how will you digest it?

Julia Stewart and I have worked for far bigger businesses than the combined IHOP/Applebee’s business, so in terms of size it’s no big deal. But it is always challenging when you buy a company: integration is always easy on paper, right? Our banker came up with a great label [for the deal]. He called it a leveraged repeat, instead of a leveraged recapitalization. We’re taking Applebee’s and restructuring it in the same way we restructured IHOP — into a model that generates high levels of cash flow through royalty payments. Plus, we were able to raise a bunch of leverage using Applebee’s balance sheet. Of the $2 billion or so of acquisition proceeds, about $1.8 billion is coming from Applebee’s. In essence, we are leveraging off its balance sheet to buy it. Anyone in our place would have done the same.

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