July 16 (Bloomberg) -- Ihop Corp., the largest U.S. pancake- house chain, agreed to buy Applebee's International Inc. for $1.9 billion and sell securities backed by franchisee fees to finance the purchase.

Applebee's investors will get $25.50 a share, 4.6 percent more than the company's closing price July 13. Including the assumption of debt, the transaction was valued at $2.1 billion. Ihop, formerly International House of Pancakes, has 1,319 restaurants. Overland Park, Kansas-based Applebee's has 1,943.

Ihop plans to sell most of Applebee's 508 company-owned restaurants to franchisees, Chief Executive Officer Julia Stewart said in a statement today. The move will lower costs and help the Glendale, California-based company raise cash to pay off debt, the companies said.

Stewart ``has a blueprint here for doing this with Ihop,'' said Matthew Hereford, a money manager with Atlanta Capital Management Co. in Atlanta, which manages about $9 billion in assets. ``She should be able to rally the franchisees around her.'' Hereford's Atlanta-based firm owns shares of both companies.

Ihop shares climbed $4.99, or 8.9 percent, to a record $61.24 at 4:06 p.m. in New York Stock Exchange composite trading. It was the biggest jump since October 2005.

Backed by Assets

The company plans to sell debt secured with fees from Applebee's and Ihop franchisees. Ihop is following restaurant chains such as Dominos Pizza Inc. in borrowing money backed by the revenue it gets from restaurants.

Shares of Applebee's increased 53 cents, or 2.2 percent, to $24.91 at 4 p.m. in Nasdaq Stock Market composite trading.

Applebee's began seeking a buyer after shareholder Breeden Capital Management LLC nominated four board candidates in December and called the stock's performance a ``disaster.''

The company's stock declined 4.1 percent in the three years through Feb. 12, the day before it said it may sell itself. Darden Restaurants Inc., owner of the Olive Garden and Red Lobster chains, rose 86 percent during that time, while California Pizza Kitchen Inc., with about 200 restaurants, almost doubled.

Ihop, which has about half of Applebee's market value, said in February it may acquire a chain that isn't a competitor. The agreement quadruples Ihop's annual sales.

The first International House of Pancakes opened in 1958 in Toluca Lake, California. In the 1960s, it bought franchises including Orange Julius, Love's Wood Pit Barbecue and the Original House of Pies.

Years of Growth

The first Applebee's opened in Atlanta in 1980 as T.J. Applebee's Rx for Edibles and Elixirs, and the concept was bought by W.R. Grace & Co. three years later.

A pair of Kansas City franchisees bought the rights to the concept from W.R. Grace in 1988 and sold shares to the public a year later. The chain had 54 locations in 1988, and 1,000 by 1998.

Stewart, who joined Ihop in late 2001, employed a similar tactic with Ihop, reducing the number of company-owned restaurants to 10 last year from 72 in 2002. The strategy helped boost profit the last two years after two previous years of declines.

``I think people realize we did it at Ihop,'' Stewart said in an interview. ``We reenergized the brand and turned the business around. It's really our proven competency.''

She said the sale of the stores may generate $550 million. Ihop also plans to sell Applebee's real estate and lease it back, raising $400 million. Applebee's plans to use the cash to repay debt.

Ihop was advised by Greenhill & Co. and Skadden, Arps, Slate, Meagher & Flom LLC.

Banc of America Securities LLC and Citigroup Inc. were Applebee's financial advisers. Cravath, Swaine & Moore LLP; Simpson, Thacher & Bartlett LLP; and Blackwell Sanders LLP provided legal advice. Lehman Brothers Holdings Inc. also provided financial support.

To contact the reporter on this story: Mark Clothier in Atlanta at mclothier@bloomberg.net

Last Updated: July 16, 2007 16:15 EDT