Reuters reported Wednesday afternoon that Papa John’s reached out to potential buyers to ask them to submit offers. According to “people familiar with the matter,” the 5,000-plus-unit pizza chain sent out information this week about an auction to sell itself to other companies and private-equity firms. The sources told Reuters Papa John’s expects to receive first-round bids by the end of October. They added that Papa John’s could explore an alterative deal, like a capital investment, if a sale doesn’t fit.
Papa John’s declined to comment on the matter to Reuters. The news sent its shares up 8.5 percent on the stock market to $50.14, which represented a market value nearing $1.6 billion.
This followed a separate story from CNBC that said beleaguered owner John Schnatter had reached out to private-equity firms to discuss a partnership that would allow him to buy out Papa John’s. He currently owns about 30 percent of the chain’s stock and was blocked from buying his way into a majority share in July when Papa John’s board adopted a “poison pill” to prevent a hostile takeover. The so-called “poison pill” lays out conditions that will dilute the value of Papa John’s stocks should any party attempt to acquire 15 percent or more of common shares. Such an action would open the door for shareholders to purchase additional stocks at a discount, thus decreasing each individual share’s value.
A spokesman for Schnatter denied the allegations, saying, per CNBC, “John Schnatter has not reached out to or had any discussions with any private equity firm or any other entity about buying Papa John’s. Any such report about a potential transaction involving Mr. Schnatter is totally and completely false.”
CNBC, which said Wednesday it was standing by its report, noted that “several private-equity firms” turned down Schnatter “concerned about the reputational risks inherent in partnering with him.”
Schnatter’s stake in Papa John’s could be a hurdle in any potential deal, depending on his future involvement in the company. This appeared to be the case in July when alleged talks between Papa John’s and The Wendy’s Co. fell through. The Wall Street Journal reported the two companies held preliminary merger discussions, but the possibility fizzled following a July 11 report that Schnatter used a racial slur during an in-company conference call. Wendy’s CEO Todd Penegor chose not to address the rumor during the company’s last conference call, saying, in regards to future M&A opportunities: “Yeah, we’d have to look at would it complement the capabilities that we have? Could it accelerate the capabilities that we have? Would it work for our franchise community? But that said, investing in growth is our number one priority, and that’s we’ll stay focused.”
Papa John’s problems have accelerated since Schnatter railed against the NFL’s handling of anthem protests during a November conference call, suggesting it sagged the chain’s sales. “The NFL has hurt us,” he said. “And more importantly, by not resolving the current debacle to the player and owners’ satisfaction, NFL leadership has hurt Papa John’s shareholders.” The incident dropped Papa John’s stock 11 percent at the time, and current-CEO Steve Ritchie, who took over for Schnatter in January, said the consumer sentiment turned dramatically.
Ritchie said Papa John’s was 1.1 percent positive in same-store sales in Q3 2017. After the call, a sharp decline sent the chain to a negative 3.9 percent finish. Ritchie said the comp trends have “basically been between negative 5 and negative 6 percent since that event.”
Before Schnatter’s decision to step down as chairman on July 11, Ritchie said comps declined 6.1 percent to start Q3. Once the news hit, he said, the company saw “another precipitous drop of roughly 4 percent” due to the “very inexcusable and irresponsible comments from Mr. Schnatter.”
Schnatter has not agreed with the notion that his actions triggered a sales plummet. In Schnatter’s view, Papa John’s performance was declining “long prior” to his NFL comments. He added that his comments during the racial-slur incident “were seriously misrepresented.
Schnatter has gone after management, including Ritchie, and also sued Papa John’s to stop “the irreparable harm” they are causing the company.
Papa John’s warned “a number of store closures in the U.S.” could be coming as sales deteriorate—North America comps fell 6.1 percent this past quarter, with July accelerating to 10.5 percent. It announced an assistance program for franchisees in August that includes certain reductions in royalties, food-service pricing, and online fees through 2018. In addition, funds will be provided to support new marketing and re-imaging initiatives consistent with the company’s new brand direction.
Last week, Papa John’s unveiled its new campaign, “Voices,” which spotlights the faces and stories behind the chain. Employees volunteered to participate in the creation of the campaign “and represent the heart of the brand because they’re working every day to provide customers with better service and better pizza,” Papa John’s said. There was also a report from AdAge that Papa John’s was thinking about dropping the apostrophe from its name and designing a new logo.
