Papa John’s International is handing over the keys to the embattled pizza chain in exchange for a $200 million investment.
Activist fund Starboard Value is supplying the funds and its chief executive officer, Jeffrey Smith, is becoming chairman. He steps into the role vacated last year by Papa John’s founder John Schnatter after reports emerged that he used a racial slur. Schnatter tried to make his own similar deal and said he was shot down.
The infusion comes as the pizza chain also reported preliminary results for the fourth quarter and last year that missed analysts’ estimates. The company had already been in a sales slump before the latest controversy began last summer. Papa John’s plans to use the proceeds to repay debt and invest in the business, it said in a statement. Starboard is making its investment through the purchase of new convertible preferred stock, and the deal includes the option of an additional $50 million investment.
Shares of Papa John’s gained as much as 12 percent in premarket trading.
Besides Smith, the board added another independent director — Anthony Sanfilippo, former chairman and CEO of Pinnacle Entertainment Inc. Current Papa John’s CEO, Steve Ritchie also joins as a director. With the additions, the board now has nine directors.
The board approved the Starboard plan Sunday night, and Schnatter voted against it, according to a person with knowledge of the vote. In a filing, Schnatter said he made a similar offer to the board over the weekend, but with reduced costs to the company and with an additional $10 million to be made available to qualified franchisees. He said the company rejected his proposal.
“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,” Olivia Kirtley, a member of the special committee that initiated the review, said in a statement.
In the months following Schnatter’s July departure as chairman, speculation has swirled around the struggling pizza chain, with reports that Wendy’s and Trian Fund Management had evaluated takeover bids. But any kind of transaction wouldn’t be easy without the backing of Schnatter, who founded the company and owns about 30 percent of Papa John’s.
Papa John’s worked to distance itself from Schnatter and removed him from its marketing. In July, the company’s board adopted a poison pill to prevent him from adding to his stake or gaining majority control.
But those attempts failed to help results. Papa John’s systemwide same-store sales in North America, a key performance metric, fell 8.1 percent in the fourth quarter, preliminary data show. Analysts projected a drop of 6.3 percent, according to Consensus Metrix. Internationally, that measure likely dropped 2.6 percent, the company said in unaudited results, compared with estimates they would grow 0.1 percent.
Starboard has previously mounted activist campaigns at Olive Garden owner Darden Restaurants, Yahoo, Symantec Corp. and other companies. Starboard has recently taken a stake in pharmaceutical giant Bristol-Myers Squibb, according to people with knowledge of the matter.