Applebee's acquisition going worse than anyone had predicted

When IHOP acquired Applebee's to form DineEquity (NYSE: DIN) back in July of 2007, I wrote this:

Maybe IHOP can work some magic and turn the chain around, but it might be difficult. The company is financing the entire acquisition with debt, and may not be so quick to provide the face lift the restaurants so badly need.

But then again, IHOP's revenue in 2006 was lower than it was in 2002. So maybe this is a case of two drunken sailors trying to hold each other up. There's nothing much to get excited about for shareholders of either company.

Since then the stock has gone from around $60 per share to $16, and Robinson Humphrey analyst Christopher O'Cull wrote in a note to investors that turning around Applebee's and refranchising stores to pay down debt is hardly an easy bet: "Even in a favorable economic environment this plan would be difficult to execute with little precedent within the restaurant industry. Now, given the weakening consumer backdrop coupled with tightening credit conditions this task will prove even harder." More ominously, O'Cull warned that if the company is unable to refranchise stores quickly, it may have to reduce its debt load "in a fashion that would be materially dilutive to equity holders." And with the stock price in the toilet, the timing couldn't be worse.

I don't take too much credit for being skeptical of the deal: betting on the failure of a large scale acquisition is like betting on Tiger Woods to make the cut at a Hooters Tour event.

A good rule of thumb that will save you from a lot of disaster: when a company you own announces a major acquisition, sell the stock.