Financing

Starboard makes a $200M investment in Papa John’s

Jeff Smith was named chairman as the company got a cash infusion to pay off debt and invest behind its strategic initiatives.
Photograph: Shutterstock

Papa John’s International on Monday announced that it has received a $200 million strategic investment from Starboard Value LP, the activist investment firm that once upended the entire board of Darden Restaurants.

Starboard CEO Jeffrey Smith has been named Papa John’s chair, and Anthony Sanfilippo, the former CEO of Pinnacle Entertainment, has also been named a director along with current Papa John's CEO Steve Ritchie.

As part of the deal, Starboard receives $200 million worth of Papa John’s stock and has the option to make an additional $50 million investment in the pizza chain by the end of March.

The deal also includes an option that will allow the company’s franchisees to acquire up to $10 million in preferred Papa John’s stock at the same terms as Starboard.

Papa John’s plans to use the funds to repay debt and invest behind its strategic priorities.

John Schnatter, the company’s embattled former chairman, said in a federal securities filing Monday that he is evaluating legal remedies following the investment. The company’s disgraced founder, who is battling for control of the company he led for years, had made his own bid to invest up to $250 million in the company.

Schnatter made the offer on Saturday after learning of the Starboard deal, according to the filing, and argues that his terms are better than the one Papa John’s accepted from the activist investor. Schnatter would have nominated two board members under his offer, which has since been rescinded given Papa John’s announcement.

Schnatter remains a company director and owns 30% of Papa John’s stock.

The investment follows a monthslong strategic review at the 5,200-unit company that began after the chain was plunged into controversy with the admission by Schnatter that he used a racial slur during a conference call.

Schnatter resigned as chairman and was removed from the company’s ads, though he remains a director and has been engaged in a battle with the company he led for years.

The investment sent the company’s shares up nearly 6% in premarket trading Monday.

The agreement “provides the company with financial resources and strong and experienced directors on the board to position the company for success over the long term,” Olivia Kirtley, former Papa John’s chairman and a member of the special committee appointed to oversee the review. “Starboard’s investment represents a strong vote of confidence in Papa John’s, our people, our franchisees and many opportunities we have ahead.”

The investment follows a year in which same-store sales in North America plunged 7.3%, including an 8.1% decline in the fourth quarter—numbers that were slightly higher than the company had expected. Internationally, same-store sales fell 2.6% for the year.

But the company also said that same-store sales fell 10.5% in January in North America amid “challenges the brand has encountered in the U.S.” and a conversion of the company’s new loyalty program.

Papa John’s also blamed “ineffective promotions in the heightened competitive environment.”

“These results are disappointing to all of us,” Ritchie said in a statement. “But we have a strong foundation built on quality and are confident in the great growth potential for the brand.”

Smith is known most in the restaurant space for engineering a remarkable takeover at the board of Olive Garden’s owner Darden—winning all 12 seats on the company’s board in 2014. Smith spent two years as the company’s chairman, a period in which the Orlando, Fla.-based company turned around under CEO Gene Lee.

This is a different situation: Papa John’s is hoping the investment will provide resources to stabilize its finances and invest in strategies that can reverse its sales slide, which has left franchisees closing locations in some markets.  

The investment from Starboard includes a one-year lockup period that will keep the company from selling its shares immediately. Starboard would own between 11% and 15% of Papa John’s stock.

“We applaud the actions that the board and management have taken to move the company forward through a difficult transition,” Smith said in a statement. “We see tremendous potential for the company both in the U.S. and internationally. We look forward to providing leadership, sponsorship and support to instill operational, financial and corporate governance best practices, and working with the Papa John’s team to develop a disciplined long-term strategic plan.”

UPDATE: This story has been updated to include news of John Schnatter's bid to invest in the company.

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