Papa John’s International and Starboard Value, a New York investment adviser, have sealed a deal that will give the Louisville-based pizza chain a minimum of a $200 million cash infusion and the firm a seat on Papa John’s board of directors, the company announced Monday morning.
The agreement allows Starboard to purchase Series B convertible preferred stock at a 22.5 percent premium. The final price is based on the 10-day volume weighted average trading price of Papa John’s common stock ending Feb. 15 and is capped at $34.66 per share and $50.06 per share. Based on the stock’s closing price Friday, Starboard’s initial $200 million investment would equal an 11 percent to 15 percent stake in the pizza chain, the company noted in a detailed news release.
Starboard cannot transfer its shares until a year after the deal closes.
The securities purchase agreement also includes the option for Starboard to invest another $50 million through March 29 and gives certain franchisees the right to purchase up to $10 million of Series B stock at the same terms as Starboard. Roughly half the money will be used to repay debt, and the remainder will be invested in five priority categories: people, brand, value/product, technology and unit economics.
In a U.S. Securities and Exchange Commission filing, company founder John Schnatter said that the company rejected his $250 million investment offer, which included limited voting rights and a reduced dividend payout rate on shares. Schnatter said his offer was “substantially similar to, but superior to” Starboard’s offer, and he is looking at “legal remedies” in light of the decision.
In addition, Papa John’s has added three positions on its board, bringing total membership to nine. The new members are the Papa John’s president and chief executive, Steve Ritchie, Starboard CEO Jeffrey C. Smith and former Pinnacle Entertainment’s CEO Anthony M. Sanfilippo. Pinnacle Entertainment is a casino operator.
“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, most recently chair of its board, said in the release. “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. Starboard’s investment represents a strong vote of confidence in Papa John’s, our people, our franchisees and the many opportunities we have ahead,” she continued.
The news followed a report last week from Reuters that the pizza purveyor was no longer planning to sell the entire business but rather just a slice. The company had hired Bank of America Merrill Lynch and Lazard in August 2018 to evaluate its options, including an investment partnership and possible sale.
“Papa John’s has always stood for higher quality pizza, and we believe Papa John’s has a strong foundation, with the best product in the space and a strong franchisee and customer base,” Starboard’s Smith said in the release. “We applaud the actions that the Board and management have taken to move the Company forward through a difficult transition. We see tremendous potential for the Company both in the U.S. and internationally.”
In the release announcing the investment deal, Papa John’s noted that same-store sales plunged 10.5 percent in January.
“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. 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,” Ritchie said in the release.
Its same-store sales in North America declined 7.3 percent in 2018, in the middle of the company’s expectations. Its previous guidance stated that same-store sales were expected to decline anywhere from 6.5 percent to 8.5 percent.
Earnings per share is expected to be near the low-end of Papa John’s guidance, which was a range of $1.30 to $1.60. The company will release its full fourth quarter and year-end earnings on Feb. 28.