Activist Investor Takes the Reins at Papa John's

Last September, Papa John’s International Inc. (NASDAQ: PZZA) put out feelers seeking a buyer for the troubled pizza restaurant chain. Since then, not a lot has happened publicly, until Monday morning, when the company announced a $200 million investment by activist investor Starboard Value and the installation of Starboard’s CEO, Jeffrey R. Smith, as chair of Papa John’s board of directors.

Starboard’s investment came in the form of Series B convertible preferred stock that valued Papa John’s at $38.51 per share based on Friday’s closing price and represents approximately 11% to 15% of the company’s outstanding common stock. The activist also has an option through March 29 to purchase another $50 million of convertible preferred stock on the same terms.

Shareholders and investors appear to love the deal, sending the shares up 6.5% in premarket trading Monday. Maybe that’s because five years ago Starboard forced a change in the board at Darden Restaurants Inc. (NYSE: DRI) and succeeded in turning around that company’s flailing Olive Garden restaurant chain.

Late in 2017, John Schnatter, Papa John’s founder, chief executive and board chair, was fired as CEO and resigned as chair following a report he had used a racial slur in a conference call with the company’s media firm. Schnatter, who owns about 31% of the company and still retains a seat on the company’s board, also had been trying to find a partner to join him in purchasing the entire company. He voted against the Starboard deal, according to a report in The Wall Street Journal.

Starboard also placed another member on Papa John’s expanded board, and CEO Steve Ritchie also was added to the board. The board was expanded from seven to nine members.

Papa John’s said it plans to use about half the Starboard investment to pay down debt and the rest “to further advance its five strategic priorities of People, Brand, Value/Product, Technology, and Unit Economics.”

The restaurant chain also has the right to offer franchisees who meet the federal requirements of accredited investor an opportunity to purchase up to $10 million in the same Series B shares, which will pay an annual dividend of 3.6% and are redeemable after eight years for cash. Starboard has agreed to a lock-up period of one year during which it may not transfer its Series B shares.

In addition to the news of Starboard’s investment, Papa John’s announced some preliminary financial results, none of which was particularly impressive. Fourth-quarter North American sales fell 8.1% year over year, and full-year sales were down 7.3%. International sales also dropped. Adjusted diluted earnings per share are estimated to come in near the low-end of the company’s forecast of $1.30 to $1.60. North American sales for January were down 10.5%.

Over the past 12 months, Papa John’s stock has dropped 33%, including a drop of nearly 9% last Friday. The stock closed at $38.51 Friday, in a 52-week range of $38.05 to $64.18. The 12-month consensus price target on the stock is $57.50.