LOUISVILLE, Ky. (WDRB) – Louisville-based Papa John’s International on Monday announced a $200 million investment aimed at boosting the struggling pizza chain, while disclosing that sales remain depressed.
Starboard Value LP, a New York activist investment firm known for helping reverse declining sales at the company behind the Olive Garden chain, will inject $200 million into Papa John’s, with an option to invest another $50 million, for newly issued convertible stock worth about 11 - 15 percent of the company.
The deal comes in lieu of outright sale of Papa John’s, which had been rumored for months in financial media.
The Starboard investment comes over the objection of John Schnatter, Papa John’s estranged founder and largest shareholder, who on Saturday offered the company a similar deal but on more favorable terms, Schantter said in a regulatory filing on Monday.
Schnatter, who already has two lawsuits against the company, said he was “evaluating the legal remedies available to him in connection with” the board’s decision to accept the Starboard investment over his own proposal, which would have provided the same capital at a lower cost, he claims.
Schnatter, who was sidelined last summer after admitting he used racial language on a private conference call, remains the company’s largest shareholder with about 30 percent of the stock.
The $200 million investment will allow Papa John's to pay down debt, saving about $4.5 million annually, but it also requires special and regular dividends to Starboard amounting to about $11 million to $12 million a year, analyst Peter Saleh of BTIG Research wrote in a note to clients Monday.
As part of the deal, Starboard CEO Jeffrey Smith will become chairman of Papa John’s board, while Papa John’s CEO Steve Ritchie – whom Schnatter groomed as his replacement before calling for his ouster last year – will remain in his position and get a seat on the board.
Anthony M. Sanfilippo, former CEO of casino operator Pinnacle Entertainment, will also join the Papa John’s board as part of the Starboard deal.
About half of the $200 million will go toward paying down debt while the rest will be for investments in the business, the company said, adding that the deal not only provides funding but also turnaround expertise.
“We believe we have found terrific partners to advance Papa John’s strategy, especially given their record of reinvigorating and growing premier restaurant and consumer brand companies,” said Olivia Kirtley, who has led the Papa John’s board since Schnatter resigned as its chairman last summer, in a news release.
Papa John’s disclosed Monday that comparable sales in North America, the company’s largest division, dropped 8.1 percent in the final three months of the year compared to the same period in 2017.
It marks the fifth-straight quarter of declining domestic sales, an unprecedented streak since Papa John’s went public in 1993.
The downward trend continued in January, as domestic comparable sales fell 10.5 percent from a year earlier, the company disclosed on Monday.
Saleh, of BTIG Research, said the sales declines were worse than expected and indicate the company is far from revitalized.
"We applaud Papa John’s management for its ability to secure an investment and the expertise of Starboard as they seek to turn around the business. With that said, we believe there is much work yet to be done," Saleh said in the research note.
Papa John’s said the declines reflect “the consumer sentiment challenges the brand has encountered,” big changes to company’s customer loyalty program beginning in December and “ineffective promotions in the heightened competitive environment.”
“These results are disappointing to all of us, but we have a strong foundation built on quality and are confident in the great growth potential for the brand, particularly with the support of our new partners,” Ritchie said in a news release.
Saleh said the December overhaul of the Papa Rewards loyalty program contributed to the company's sales declines, "as existing customers redeemed points at a much faster rate than the addition of new customers to the program."
Civic leaders concerned about the future of one of Louisville's prized corporate headquarters said the investment is welcome news and preferable to an outright sale of the company.
"That's the positive," said Kent Oyler, president and CEO of Greater Louisville Inc., the metro chamber of commerce. "...I think that's a vote of encouragement in the leadership team there ... Overall, (I am) very encouraged that it will help retain that company here in town and help it grow."
In addition to the $200 million, Starboard has the option to invest another $50 million in Papa John's by the end of March. Whether Starboard exercises that option bears watching, Saleh said.
"We believe this decision to upsize could be a key gauge of Starboard’s confidence in the company’s turnaround plans and sales trajectory or lack thereof," he said.
Starboard in 2014 mounted a successful takeover of Darden Restaurants, the company behind Olive Garden and other chain restaurant brands.
"(I)ts most visible success story in the restaurant industry was creating value at Darden about five years ago through a combination of cost cutting, asset sales, and leadership changes," Stifel analyst Chris O'Cull wrote in a note Monday.
