Just days after Papa John’s revealed that it had failed to find a buyer for the struggling pizza delivery brand following a year of embarrassing racially-tinged scandals that ultimately led to its founder and chairman, John Schnatter, stepping down, the Wall Street Journal reported Monday morning that legendary activist hedge fund Starboard Value has invested $200 million. As a result, Starboard CEO Jeffrey Smith will become the company’s new chairman, a role which was swiftly confirmed by the company.
When the company’s board voted to accept the Starboard deal Sunday night, Schnatter was reportedly the only member to vote against it. Starboard will buy the stake 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.
Starboard will also have the option of investing another $50 million before the end of March, while the company also gives qualified franchisees the option to buy $10 million in stock under similar terms. Smith reportedly hasn’t spoken with Schnatter, who still owns 31% of the company, but says he would like to work with him.
Jeffrey Smith
According to WSJ sources, unlike its approach to Darden, Starboard sees more value in investing in the brand than cutting costs and streamlining operations, suggesting that this might be more of a ‘buy-the-dip’-type play after a rough year for the company’s stock. Papa John’s will reportedly use half of Starboard’s investment to pay down debt, and the other half to invest in marketing that will spin its pizza as using fresh ingredients.
Shares of the pizza chain climbed 6.5% in the premarket, undoing most of Friday’s nearly 9% drop.
Papa John’s is the legendary value investor’s first big restaurant play since the now-infamous boardroom coup at Darden Restaurants, where Starboard successfully replaced Darden’s entire board after building an 8.8% stake in the struggling restaurant-chain owner. Under Starboard’s leadership, Darden reinvented the menu and kitchen service at the Olive Garden, setting off an unprecedented turnaround that saw Darden’s struggling stock climb to new record highs.
Investors in Papa John’s, which trails Dominoes Pizza and Yum Brand’s Pizza Hut as the third largest pizza delivery company, have endured a year of turmoil since Schnatter blamed the company’s slowing sales on NFL racial equality protests (the chain later severed a sponsorship deal with the NFL). He eventually stepped down after reports about him using the N-word during a sensitivity training conference call.
In addition to Smith, Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment, will be joining Papa John’s board. Papa John’s CEO Steve Ritchie will also join the board, while retaining his CEO role.
Of course, given Starboard’s success with Darden, investors will undoubtedly have high expectations about its investment in Papa John’s. But while the angle that Starboard is pursuing might be different, some of the obstacles facing Starboard are the same: An intransigent board, sagging sales, brand confusion – but whether it can pull off another food-service miracle remains to be seen.
via ZeroHedge News http://bit.ly/2GmJmaA Tyler Durden