A Taste of Change at Applebee's

I recently asked whether Applebee's (Nasdaq: APPB) was ripe for change, but some seem to think it's closer to rotten. Shareholder activist Breeden Capital Management, which recently picked up a 5.25% stake in the restaurant company, is nominating four candidates to the company's board of directors and agitating for some serious change.

Breeden is a hedge fund headed up by Richard Breeden, a former chairman of the SEC. Breeden's press announcement cited Applebee's "disregard" for shareholder interests and "severe performance problems," with a 13.4% decrease in total return over the last three years. Breeden complained about governance, too. The fund said that a recent amendment of Applebee's bylaws -- pushed through shortly after Breeden took its stake -- meant that Breeden had to rush to nominate board members by this week, since shareholders wouldn't have had another opportunity to consider alternative directors until May 2008. Breeden is also trying to push Applebee's to eliminate its staggered board and adopt majority voting.

Back in April, I wrote an article about proxy statements and shareholder resolutions -- they can make for good (and sometimes weird) reading, and can also give a good idea of what kinds of risks might face a company (proxies are found for free on sec.gov, under the general document type DEF 14A). I peeked at Applebee's proxy statement from last year and saw the only shareholder resolution was from PETA, which pushed for a quarterly report detailing progress regarding poultry slaughter methods, designed to push new humane slaughter methods for chickens. This coming year, it seems there will be bigger fish to fry at Applebee's, regarding a topic that means more to a greater proportion of shareholders.

Even though shareholder resolutions rarely gain traction, in some instances, they've catalyzed change, or even succeeded entirely. Take, for example, what happened at Flamel (Nasdaq: FLML) last year: dissident shareholder OSS Capital Management won a proxy fight to replace the existing slate of directors. Wendy's (NYSE: WEN) is also a good example -- shareholder activism resulted in its spinoff of Tim Horton (NYSE: THI). McDonald's (NYSE: MCD) may have snubbed some of the recommendations by shareholder activists this year, but it had its own plans up its sleeve for increasing shareholder value -- and the way this year has been going, its investors have little reason to complain.

On the other hand, it seems clear that Applebee's shareholders do have reason to complain about current execution. Breeden suggests that Applebee's reduce the number of company-owned restaurants through refranchising, cease capital expenditures to open new restaurants, cut expenses, use excess cash to increase free cash flow to shareholders, and improve governance practices. These steps are similar to those AutoZone (NYSE: AZO) has taken to improve shareholder value.

When Fool contributor John Bluis took a look at Applebee's in February, he noted that the company's CEO said that the best thing he could say about 2005 was that it was over (yikes). John then predicted in April that Applebee's could face angry shareholders soon. In November, I couldn't help but think the time was drawing nearer still. The pressure is officially on; now we wait and see whether Applebee's changes course.

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Alyce Lomax does not own shares of any of the companies mentioned.