Papa John's Picks Hedge Fund Starboard Over Founder For Investment

By Dave Simpson
Papa John's Picks Hedge Fund Starboard Over Founder For Investment

Papa John's International Inc has unveiled an investment of up to $250 million from hedge fund Starboard Value LP, snubbing a rival offer from founder John Schnatter, who is seeking to regain control of the world's third largest pizza delivery company.

The deal marks the next chapter in the battle between Papa John's and Schnatter, who resigned as chairman last July, following reports he had used a racial slur on a media training conference call. He later said he regretted his decision, arguing his comments were taken out of context.

The dispute has taken a toll on the company, which said that its North America same-store sales decreased by 10.5% in January, after dropping 7.3% in 2018.

Papa John's has been seeking to fend off competition from rivals such as Dominos Pizza Inc and Yum! Brands Inc's Pizza Hut through promotional discounts, which have yet to pay off.

Under the terms of the deal, Starboard CEO Jeffrey Smith will become Papa John's chairman and Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment, will join as an independent director.


Papa John's CEO Steve Richie will also join the company's board, expanding it from six members to nine and further diluting the influence of Schnatter, who also sits on the board.

The deal is unusual for Starboard, which typically amasses stakes in companies in the open market rather than through negotiated deals. Starboard will buy $200 million worth of newly issued Papa John’s convertible preferred stock, equivalent to approximately 11% to 15% of the company's outstanding common stock. Before the deal was announced, Schnatter owned about 30% of the company.

Starboard has an option to buy an additional $50 million of Papa John's convertible preferred stock on the same terms.

"I think it is the highest quality pizza in the segment," Smith told Reuters in an interview.

"We believe that with our involvement we can help the company to refocus on its competitive advantages and move forward to get its culture and focus back in the right place on how to improve the company."


Reuters reported last week that Papa John's was seeking to sell a stake in the company after acquisition offers from private equity firms were too low.

Schnatter said in a regulatory filing that he had also offered an investment of up to $250 million to Papa John's at a lower financing cost than Starboard's deal, but the company rebuffed him.

Sources close to Papa John's said it opted for Starboard's deal, even though it was slightly more expensive than Schnatter's, because it did not want to give the founder more influence over the company.

"Attracted To New Thinking"

"We were very attracted to the new thinking and the new leadership, which is why the decision was made to appoint Jeff Smith the chairman of the board," CEO Ritchie said in an interview with Reuters.

Schnatter said in the regulatory filing he was evaluating his legal options after his offer was rejected. He already has lawsuits pending against the company, and last month claimed a victory when Chancellor Andre Bouchard of Delaware Court of Chancery ordered the Papa John's board to give Schnatter some internal documents and communications, including text messages on personal devices, related to his firing.


It remained unclear whether Schnatter will put forward a slate of board nominees to take control of Papa John's. The company typically holds its annual shareholders meeting in May, when directors are elected.

Starboard cemented its reputation as a savvy restaurant investor when it unseated all of Darden Restaurant Inc's board in 2014. The stock price has gained nearly 150% since then.

Starboard was one of only a handful of activist hedge funds to make money last year, returning 1.7%, compared with an 11.3% loss for the average activist hedge fund.

Lazard and BofA Merrill Lynch are financial advisors to the special committee of the Papa John's board that negotiated the deal with Starboard. Akin Gump Strauss Hauer & Feld LLP is legal counsel to the special committee, and Hogan Lovells US LLP is legal counsel to the company.

News by Reuters, edited by Hospitality Ireland. Click subscribe to sign up for the Hospitality Ireland print edition.