Papa John’s International Inc. PZZA 8.98% shares jumped Monday after activist investor Starboard Value LP said it would make a $200 million investment and its chief executive will become chairman of the pizza chain.
The deal caps more than a year of tumult at the struggling pizza company.
Starboard, well known in the restaurant industry for its 2014 board coup at Olive Garden parent company Darden Restaurants Inc., has secured the board chairmanship for its CEO, Jeffrey Smith.
It also obtained a board seat for Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment Inc. Papa John’s CEO Steve Ritchie will join the board and remain the company’s CEO.
Shares of Papa John’s closed up nearly 9% Monday at $41.97.
Starboard has also taken activist roles in businesses such as Yahoo Inc. and cybersecurity company Symantec Corp.
Last month, it disclosed a 1.7% stake in Dollar Tree Inc., where it is seeking control of the company’s board.
The Darden takeover nearly five years ago was a major activist victory, according to bankers and corporate-governance experts. Starboard waged a proxy fight that ended with it replacing Darden’s board with its own picks. The new board pushed Olive Garden to cut costs, introduce tabletop ordering and payment tablets and serve fresher breadsticks, which led to a rapid turnaround of the chain.
“This has been a fun due diligence process for me and my office. We’ve been bringing in Papa John’s pizza and rivals’ pizza and doing taste tests in our office several times a week,” Mr. Smith said in an interview, adding that Papa John’s won the informal taste tests.
Papa John's founder and former CEO John Schnatter in 2017. PHOTO: TIMOTHY D. EASLEY/ASSOCIATED PRESS
“Of course there are opportunities for cost efficiencies. But our goal here is not to come in and cut costs; it’s to make the company stronger for shareholders and the whole organization,” Mr. Smith said.
The pizza chain for more than a year has suffered from declining same-store sales, which the company has attributed, in part, to controversies involving its founder and largest shareholder, John Schnatter.
In a Securities and Exchange Commission filing on Monday, Mr. Schnatter said that upon learning of Starboard’s offer on Saturday, he made his own competing offer of an investment of up to $250 million, but the independent board members rejected it.
Mr. Schnatter said that in light of the Starboard investment, he is withdrawing his offer.
A Papa John’s spokeswoman said the company’s independent board members “unanimously concluded that the Starboard investment was superior to Mr. Schnatter’s proposal.”
Starboard’s move comes as the company has been losing market share to rival pizza makers with larger advertising budgets.
Papa John’s, the world’s third-largest pizza delivery chain by sales, plans to use approximately half of the investment proceeds from Starboard to repay debt and the other half to invest in the business, including to remind consumers that its pizza is made with fresh dough and ingredients that are free of preservatives and artificial flavors, Mr. Ritchie said.
“We need to do a better job at telling the quality story in a more meaningful way,” Mr. Ritchie said in an interview.
Papa John’s on Monday reported preliminary fourth-quarter results, which included an 8.1% decline in North America same-store sales. The company also said 2018 adjusted earnings per share, excluding the effect of restaurant divestitures and special charges, are expected to be near the low-end of the company’s previous forecast range of $1.30 to $1.60 per share.
Starboard is making its investment through the purchase of new convertible preferred stock, which equates to a stake of approximately 11% to 15% of Papa John’s outstanding common stock on an as-converted basis.
The deal marks the end of a five-month strategic review that Papa John’s conducted for its business.
Mr. Smith, who hadn’t spoken to Mr. Schnatter before the Sunday board meeting, said, “While I have not yet talked directly with John, I am excited about the opportunity and the ability to improve the company. I am hopeful John will agree that the best interest of the company comes first and that we can share that goal.”
Mr. Schnatter declined to comment beyond what he said in his SEC filing, according to his spokesman.
He had for many months been at odds with Mr. Ritchie, the chain’s operating chief whom he had been grooming to succeed him as CEO since mid-2016.
But the public troubles began in November 2017 when Mr. Schnatter ignored the advice of his board and, during a quarterly earnings call, blamed the chain’s slowing sales growth on the National Football League’s handling of its players’ national anthem protests.
Many people took Mr. Schnatter’s criticism of the NFL, which Papa John’s used to sponsor, to mean that he disapproved of the protests, which were intended to call attention to police brutality in African-American communities. Mr. Schnatter agreed in December 2017 to step down as CEO because of the backlash.
More trouble came in July 2018 when news leaked that he had said the “N” wordduring a marketing call that was intended to prepare him to make public appearances again on behalf of the brand. That resulted in another wave of criticism from people on social media.
Mr. Schnatter apologized for his use of the racial slur, saying he didn’t mean it as an epithet, and agreed to step down as chairman.
Mr. Schnatter said he had come to regret his decision to step down as chairman and began publicly blaming the company’s poor performance on Mr. Ritchie.
Source : wsj
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