What is Papa John’s end game?

Investors now think a sale is less likely, but the pizza chain’s “good bones” make it too tempting a target for buyers, says RB’s The Bottom Line.
Papa John's

The Bottom Line

There is too much to like about Papa John’s for the company not to get sold. But I think that as of 11:30 a.m., CDT, which is the moment I write this.

I could change my mind by the time you read this. Or by the time I finish the post.

That’s how fast the story of the pizza chain keeps changing, and how quickly sentiment has shifted as new revelations about the company and its internal machinations and disputes keep coming out.

On Tuesday, the Wall Street Journal detailed a dispute between John Schnatter and Papa John’s, including his own hand-picked CEO, Steve Ritchie.

That followed a story last week in Forbes that described a toxic “bro culture” at the Louisville, Ky.-based company that also included plenty of details about Schnatter being at odds with Papa John’s.

The stories have shifted investor sentiment about the future of the company. In the days after Schnatter resigned as chairman, many people thought that Papa John’s would get sold—and its stock actually rose.

The stories of the company culture, however, have changed that, and the stock has plunged in the days since. It was down another 3% on Wednesday. It is now trading at about under $45 a share—half its value at points last year, and lower than at any other point since 2014.

Howard Penney, an analyst with Hedgeye Risk Management, thought the company would get sold quickly after the news came out. “I don’t know about that anymore,” he told me. “These people are building a moat around themselves.”

There has been nothing like the Papa John’s story in the restaurant business. Few chains are as connected with a single person as Papa John’s is to John Schnatter. Before his comments on NFL player protests last year, he was its chairman, its CEO and a relatively popular and effective company spokesman, and he owned 30% of the company. He has lost all of that in the months since, outside of that 30%.

Shortly after the news first broke, I spoke with a private-equity executive who said this, “John Schnatter is no longer Papa John’s chairman. He isn’t the spokesman anymore. The only thing he has left is that ownership. Why would he sell?”

In addition, Schnatter until last year had been remarkably successful. His company generated consistent same-store sales and its stock more than tripled in value over a five-year period. That success means he probably has some support among Papa John’s shareholders.

The WSJ and Forbes stories seem to confirm that belief, painting a picture of a founder eager to get back to his role as company spokesman, and unsatisfied with the performance of the chain’s existing management.

Schnatter has hired a high-powered attorney and has said he regrets stepping down, as he gives interviews with the media detailing his problems with the company’s current leadership.

The problem, of course, is that Schnatter as spokesman is damaged goods at this point, no matter what you think of his comments. The brand’s reputation took a major hit after his NFL comments, and there are already indications that his chain’s same-store sales have taken a major hit after news that he used a racial slur during a conference call.

None of this is considering the impact of the loss of the chain’s NFL and MLB marketing agreements.

All of which puts the company’s future in limbo. Schnatter appears to be digging in his heels, meaning Papa John’s could be in for a long, drawn-out fight. The company will likely be unable to get new leadership while this is all happening.

The investment that will likely be required to fix the company could well discourage prospective buyers from making a deal.

And yet I still believe it gets sold, perhaps just not as quickly as I thought at first.

Papa John’s has “good bones,” to borrow a real estate phrase. It has a quality reputation. It has white space to grow internationally where that reputation is muted. Consumers love pizza. And it delivers. As Penney noted, buyers could also be tempted by that delivery expertise.

(That, in my opinion, is probably why Wendy’s was interested in a merger with Papa John’s.)

Penney doesn’t believe a strategic buyer, such as Wendy’s, would be willing to take on the company.

“It probably could do well as a private company,” Penney said. “It could fix itself and get back to the investments needed. And it needs significant investments in operations, people and culture.”

Here’s another possibility: Schnatter himself. The company’s founder has that 30%. He loves his company. He has a lot of wealthy friends. And he has that track record. It would not surprise me if he led a buyout of his own company. I have no evidence, but this sure seems like a situation in which the founder would love to regain control.

Regardless, in the end a sale seems the best way out for the company, its investors and its franchisees. And that means it will probably happen in the end.

But ask me again tomorrow. I might change my mind by then.

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