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Applebee's Exploring Options, Including Sale of Company

Restaurant chain Applebee's International's said on Tuesday it is exploring strategic alternatives, including a possible sale of the company, sending its shares soaring.

The move comes amid pressure to make changes from Breeden Capital Management, a hedge fund run by former U.S. Securities and Exchange Commission Chairman Richard Breeden.

Applebee's has been hurt by a pullback in consumer spending and increased competition from other bar-and-grill style restaurants. Its shares have substantially underperformed the Standard & Poor's restaurant index this year.

Breeden Capital has said it wants the company to reduce capital expenditures, boost cash returned to shareholders, and sell more restaurants to franchisees. In December, the fund, which holds more than 5% of Applebee's shares, nominated four candidates to the company's board.

Following the announcement on Tuesday, Breeden said in a statement that it was "pleased that the board has recognized the need to do something in the face of a failed strategy."

"We hope the company will not contemplate using this announcement as a pretext to delay the annual meeting or to entertain a sale of the company at valuations reflecting current depressed EBITDA (earnings before interest, taxes, depreciation and amortization) levels," the fund added.

Applebee's, announcing the strategic review, said it had hired Citigroup and Banc of America Securities as financial advisers.

The stock peaked at $27.32 earlier in the session, its highest level since June of 2005.

The announcement on Tuesday led Bear Stearns restaurant analyst Joe Buckley to raise his rating on Applebee's to "peer perform" from "underperform."

"Our prior underperform rating was premised on an expectation that Applebee's long-term plans would be focused on executing a turnaround," Buckley said in a research note. "Today's announcement obviously moves the company in a very different direction than we expected."

Prudential also upgraded Applebee's to "neutral weight" from "underweight."

But some analysts were skeptical about the stock. "While shareholder activism may provide some support for valuation, we believe current levels may reflect more success on those measures than may be reasonable in the near-term," Bob Derrington, restaurant analyst at Morgan Keegan, said in a research note. "At the end of the day, operating margins need to improve, in our opinion, to support share price gains."

J.P. Morgan analyst John Ivankoe cut his rating on Applebee's to "underweight" from "neutral," saying the decision to explore alternatives could pose "significant risks."

Like many casual restaurant chains, Applebee's has been struggling with a pullback in consumer spending as higher gasoline prices have cut into Americans' willingness to spend money on meals outside the home. The company has also said higher food and labor costs will hurt profits.

Applebee's has been developing several new menu items with celebrity chef Tyler Florence to try to attract customers.

Most recently, severe winter storms cut into January sales. The company said on Jan. 31 that systemwide sales fell 5.8% in the four weeks ended Jan. 28 at restaurants open at least 18 months.