Starboard Value $200 million investment lifts PZZA

Papa John’s International announced Monday that private equity firm Starboard Value LP has agreed to make a $200 million investment in the pizza chain and will place two of the fund’s investors on its board – and one will become chairman.

Starboard also has the option to make an additional $50 million investment through March 29, 2019.

Jeffrey C. Smith, chief executive officer of Starboard, has been appointed chairman of the Papa John’s board, while Anthony M. Sanfilippo, former chairman and CEO of Pinnacle Entertainment, also was appointed to a seat.

Papa John’s shares jumped about 9 percent Monday and closed at $41.97.

The moves come as the company also released preliminary results for last year showing that North American same-store sales declined 8.1 percent for the fourth quarter and 7.3 percent for the full year, in line with the company’s predictions.

Papa John’s officials said in the announcement that both men bring “substantial experience in the restaurant, retail and hospitality industries,” and that their expertise and new perspectives will help support the company’s strategy to capitalize on its the company’s market position.

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Papa John’s current president and CEO Steve Ritchie has been appointed to the board, bringing the board to nine directors, seven who are independent.

Meanwhile, company founder John Schnatter tried to match Starboard’s offer and sweeten the deal on his own. 

Schnatter says in a disclosure to the federal Security and Exchange Commission that on Saturday, after learning about the proposed Starboard transaction, he sent a non-binding offer to invest up to $250 million to match and exceed Starboard’s bid with an additional $10 million to spend on franchisees.

His bid ultimately was rejected, and Schnatter’s team said his offer was withdrawn, but he held out the possibility that he’d take legal action as a result of the company’s move.

The Louisville-based pizza chain has weathered months of turmoil after Schnatter admitted to using the N-word in a media training session last July, and for months before that, dealing with backlash from Schnatter having blamed poor sales on the company’s NFL sponsorship when the league dealt with black player’s national anthem protests.

Schnatter resigned as chairman and was locked out of the company’s office while having a contract to serve as the company’s main spokesman canceled.

In September, Papa John’s – with a special committee of board directors with advisers Lazard and Bank of America Merrill Lynch – said it began evaluating a range of strategic options with the goal of maximizing value.

“After extensive discussions with a wide group of strategic and financial investors, the board concluded that the investment agreement with Starboard was in the best interest of shareholders,” according to a Monday morning announcement.

“Our agreement with Starboard concludes a comprehensive strategic review conducted over the past five months to better position Papa John’s for growth, improve the company’s financial performance and serve the best interests of our stakeholders. This transaction provides the company with financial resources and strong and experienced directors on the board in order to position the company for success over the long term. 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, a member of the special committee and most recently chairman of the Papa John’s board.

“Starboard’s investment represents a strong vote of confidence in Papa John’s, our people, our franchisees and the many opportunities we have ahead. We are excited to work with Jeff as our new Chairman and look forward to welcoming Anthony and Steve to the board.”

Added Ritchie: “Our agreement with Starboard marks an exciting step forward for Papa John’s. I look forward to working with Jeff and Anthony, as well as the rest of our Board and team, to extend our focus on better to our people, franchisees and customers in new ways,” to fortify Papa John’s position.

Who is Jeffrey C. Smith?

Smith is chief executive officer and chief investment officer of Starboard, a New York City-based investment adviser that focuses on investing in U.S. publicly traded companies.

He was named to the Nation’s Restaurant News Power List of the 50 Most Powerful People in Food Service in 2015. He also serves as chairman of the board of Advance Auto Parts and is a member of the board of Perrigo.

Smith graduated from the Wharton School of Business at University of Pennsylvania, where he received a bachelor of science in economics.

Who is Anthony M. Sanfilippo?

Sanfilippo, former chairman and CEO of Pinnacle Entertainment, a casino and hospitality company, which was acquired by Penn National Gaming. He also was president and CEO of Multimedia Games and had various roles with Harrah’s Entertainment, now under the Caesars Entertainment banner. 

A look at Papa John’s stock

Papa John’s reported that its 2018 adjusted diluted earnings per share, excluding the impact of restaurant divestitures and other expenses related to dealing with the scandal starting last summer, are expected to be near the low-end of the projected $1.30 to $1.60 per share range.

Special charges related to re-branding and propping up franchisees were estimated at about $51 million, less than up to $60 million that the company predicted last year.

“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 the statement.

“Our agreement provides new expertise and additional financial resources to invest in areas that we believe are important to our customers and the opportunities ahead. Quality and how our product brings people together will be front and center in our efforts,” he said.

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