Are There Bidders for a Papa John's Auction?

Executives at Papa John’s International Inc. (NASDAQ: PZZA) have reportedly notified potential buyers asking for bids on the company. Reuters reported the quiet auction on Wednesday, citing unnamed sources.

The company stripped founder John Schnatter of his CEO role in December and then in July he resigned from his role as board chair following a report he had used a racial slur in a conference call with the company’s media firm. Schnatter, who owns about 30% of the company, denies reports that he has tried to find a partner to join him in purchasing the entire company. Papa John’s board has adopted a poison pill designed to prevent Schnatter from adding to his stake in the company.

Papa John’s hired Lazard and Bank of America in late August to provide financial advice but was not looking for a sale, according to a report at CNBC. The just-reported auction seeks potential bidders, including private equity firms, to submit bids by the end of October. There is no guarantee that any bids will be received and, if there are, there’s no certainty that one will be accepted.

Is there a real chance that a buyer is out there, circling Papa John’s, just waiting for the right moment? Somehow, it doesn’t seem very likely.

The restaurant business has been good this year, but the benefits have not been shared much with fast-food joints like Papa John’s. Same-store sales at the pizza maker’s fell more than 6% in the most recent quarter.

Wednesday’s announcement that Inspire Brands, owners of Arby’s restaurants, would pay $2.3 billion to acquire Sonic has led to speculation that the firm also might be interested in other chains, including Papa John’s. Maybe, but likely not any time soon.

At the end of last year, Papa John’s operated 5,199 stores, of which 4,456 were franchised. That doesn’t leave a lot of real estate for a potential private equity buyer to sell off.

And any acquirer is purchasing damaged goods. The parting of ways with Schnatter was widely publicized and Papa John’s image has been tarnished so much that the firm has filed for a trademark on a version of the company’s logo that drops the apostrophe. Papa Johns? Right around the corner, there, first door on your left. Mama johns are the second door.

Add to that Schnatter’s efforts to buy back “his” company, which have kept the Papa John’s story in the business news section if no longer on the front page, and it’s may have been wishful thinking that sent investors on a buying spree Wednesday, adding 8.5% to the share price in anticipation of a bidding war. This may not be the smart money.

Papa John’s shares closed most recently at $50.14, in a 52-week range of $38.05 to $75.02. The consensus price target on the stock is $51.17. Including yesterday’s boost, the company’s market cap is about $1.6 billion, with a forward price-to-earnings ratio of 31.14. That’s pretty rich and almost certainly based on a belief that a sale is imminent. Time will tell.