Papa John's
Papa John’s founder: ‘I am not going away’ Courtesy of Papa John's

Papa John’s shares buoyed by activist investor, purchase speculation

Legion Partners, CalSTRS, boost stake in the company

Papa John’s International Inc. share prices have nearly recovered from the scandal and months of public recriminations between founder John Schnatter and current management, buoyed by purchases from an activist shareholder and rumors of a possible sale.

Shares in the company have been trading mostly in the $49 to $51 range since Sept. 26, when rumors emerged that the Louisville, Ky.-based pizza delivery chain was sending out information to sell itself and that former CEO and chairman Schnatter was talking to private-equity firms to help him buy the company, of which he already owns around 30 percent.

Papa John’s declined to comment on the rumors and Schnatter publicly denied the reports, but shares jumped by around 8.5 percent anyway, from $46.21 to $50.14, on Sept. 26. They have hovered within around $1 of there ever since.

Share values have likely been helped by the Oct. 1 filing with the Securities and Exchange Commission by Legion Partners Asset Management LLC and the California State Teachers’ Retirement System, declaring that those two parties had each acquired 2.79 percent of shares.

In the filing, Legion and CalSTRS said they had bought the shares because they believed them to be “undervalued and represented an attractive investment opportunity.”

They added that they were “encouraged by the actions taken by [Papa John’s] Special Committee to begin to move the company past recent controversies to meaningfully improve shareholder value.”

That special committee had been set up following Schnatter’s resignation as chairman of the board and is comprised of everyone on the board of directors except for Schnatter, who remains a director. The committee is intended to investigate polices related to the company’s corporate culture and issues related to diversity and inclusion.

Share prices for the chain have been on a downward trend amid declining sales since the end of 2016, when they topped out above $89, but they tumbled on July 20 — by nearly 10 percent from $51.49 to $46.56 — in the aftermath of an exposé in Forbes magazine alleging a toxic culture at the chain.

The special committee was set up partially in response to the Forbes report.

Forbes had earlier reported that Schnatter had used inappropriate racially charged language during a meeting with its advertising agency in May, leading to the founder’s resignation as chairman of the board on July 11. He had previously stepped down as CEO at the end of 2017 after making controversial comments in a Nov. 1 earnings call blaming declining sales in part on the National Football League’s failure to quell silent protests by some players during the playing of the National Anthem.

Papa John’s was an official sponsor of the NFL at the time, a position since taken by Pizza Hut.

In the week following those comments, Papa John’s shares lost around 15 percent of their value, falling from around $68 to below $58.

Schnatter soon expressed regret about his decision to step down as chairman in July, as management, headed by Schnatter’s hand-picked successor, president and CEO Steve Ritchie, moved to evict the founder from his offices at the chain’s Louisville headquarters and to terminate an “Agreement for Service as Founder” that, among other things, allowed Schnatter to act as the chain’s spokesman.

Schnatter has set up his own website, savepapajohns.com, and sued the company twice, accusing it of pushing him out as chairman and of acting in breach of their duty by running the company incompetently.

In the quarter ended July 1, 2018, Papa John’s reported a 6.5 percent decline in same-store sales. In a conference call discussing those results on Aug. 8, company officials said same-store sales for July, in the aftermath of the scandal, were down 10.5 percent.

In response, share prices dipped to as low as $38.94.

Papa John’s has since launched a marketing campaign highlighting the diverse faces of the chain.

Earlier this week, the chain’s website was updated with a new gif that changes the logo from “Papa John’s” to other names such as “Papa Alaura’s,” “Papa Nadeem’s,” “Papa Daniel’s” and “Papa Kiersten’s,” underscoring the diversity of its teammates, which has been a major talking point of the chain since, Schnatter stepped down.

In its filing, Legion said it believed “multiple potential paths to significantly higher valuations exist for [Papa John’s] through strategic partnerships or improving operations as a standalone company,” as well as through cost efficiencies and refranchising of company-owned restaurants.

Legion did not respond to questions about the sort of strategic partnership it had in mind.

As for refranchising, Papa John’s currently operates 678 domestic restaurants. It refranchised its 34 restaurants in China in the quarter ended July 1, 2018. At the end of that period it had 2,729 franchised domestic and 1,840 franchised international locations.

In response to the share purchase, Papa John’s said, “Independent directors of the Papa John’s Board and members of our senior leadership team have been speaking with shareholders as part of our efforts to move the company forward.  We appreciate the support and feedback we have received and are committed to taking all appropriate steps to serve the best interests of all Papa John’s shareholders.”

Although speculation continues that Papa John’s will be sold, Peter Saleh, equity analyst and managing director for restaurants for BTIG, said in a note in August that such a sale would be difficult given Schnatter’s 30 percent ownership and the unlikelihood of his selling those shares.

“Perhaps the best indication we can cite is from August 2017 (stock was at $78), [when Schnatter said] ‘I have no intention of selling stock, I don’t want to lay on a beach, I don’t want to play golf. I want to work, is what I like to do’.”

Schnatter also would have difficulty taking over the company without management’s consent since it adopted a “poison pill” in late July.

Contact Bret Thorn at [email protected] 

Follow him on Twitter: @foodwriterdiary

TAGS: Finance News
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