Applebees (NDAQ:APPB) shares rose $0.08, or 0.33%, to $24.63 today after The Lion Fund announced that it intends to vote against the proposed merger citing the fact that the $25.50 cash offer substantially undervalues the company. The activist hedge fund, led by Sardar Biglari, aims to block the merger and encouraged the company to consider IHOP's proposed franchising plans to increase value for its own shareholders.

Sardar Biglari expressed his disappointment in the offer through a letter addressed to the company's board of directors. In the letter, the activist investor pointed out the fact that it was IHOP's stock that jumped 16 percent after the merger was announced while Applebees shareholders only enjoyed a one percent increase. This supports their thesis that the proposed transaction is simply transferring value from Applebees shareholders to IHOP's shareholders.

The activist investors also elaborated on how franchising could prove to be a substantial boon to the company's long-term value. The franchise business would enable the company to achieve higher profit margins, assume less risk, and would require very little in terms of capital expenditures. Combined, these strategic moves would lead to healthy cash flows and a higher return on capital. Unfortunately, it would be IHOP's shareholders that realize this value rather than Applebees shareholders if this transaction is approved.

In the end, there is a good argument for Applebees to either remain independent or seek a higher buyout premium. More, The Lion Fund has a successful track record in activist scenarios with its most recent sale of Friendly's Ice Cream at a substantial premium. Combined, many shareholders and investors are hoping to get more bang for their investment buck in Applebees. This makes APPB a stock worth watching!

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