Papa John’s has an activist investor now in the mix. Legion Partners Asset Management LLC disclosed a stake in the struggling pizza chain Monday. According to a Securities and Exchange Commission filing, the company is working with the California State Teachers’ Retirement system, which holds a portion of what amounts to a combined 5.5 percent stake in Papa John’s.

Per The Wall Street Journal, investors from Legion and the pension fund met members of Papa John’s special board committee. Ted White, a Legion managing director, told the WSJ that they’re supportive of the company’s steps to fix sagging sales. Papa John’s North America same-store sales declined 6.1 percent in the second quarter that ended July 1. Sales in the region then fell 10.5 percent from July 2 to July 29 and the company is forecasting negative 7–10 percent comps for the fiscal calendar.

“We think there’s a great opportunity here. It’s something the founder has put a lot of effort into building it up to where it is today,” White told the WSJ.


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Speaking of Papa John’s founder, John Schnatter, the WSJ said he hasn’t spoken with Legion, according to a person familiar with the matter. He was also in a Delaware courthouse Monday testifying against the brand after filing a lawsuit in late July that asked for documents related to his earlier departure as chairman.

He said Papa John’s refused to correct stories about the May conference call that triggered his departure. Schnatter admitted to using a racial slur in the call with then-marketing agency Laundry Service, but said the response was taken out of context.

Schnatter said in court Monday that Papa John’s board didn’t back him in clarifying the NFL comments last November, either. There he blamed tepid sales on the NFL’s handling of anthem protests, saying, “The NFL has hurt us. And more importantly, by not resolving the current debacle to the player and owners’ satisfaction, NFL leadership has hurt Papa John’s shareholders.”

The board asked Schnatter to exit as CEO in December instead. Schnatter said in court that the company was trying to push him out and the board breached its fiduciary duties. He also said he planned to fire current CEO Steve Ritchie. Schnatter holds a 30 percent stake in the company. However, he can’t buy more until July 2019 thanks to a “poison pill” plan the board implemented to prevent a hostile takeover.

Papa John’s told CNBC in a statement: “We have already provided John Schnatter all of the materials he is entitled to as a director and will not be distracted by his misstatements, words and actions. There is nothing he’s entitled to that he hasn’t already received. This is being dealt with through the appropriate legal channels.”

About three years ago, Legion worked with the California teachers’ fund to launch a proxy fight to push Perry Ellis International Inc. to sell itself. They withdrew their director nominees after the company committed to refresh its board.

In regards to Papa John’s, Legion said, “multiple potential paths to significantly higher valuations exist,” in the filing. They suggested boosting profits by cutting costs and refranchising.

Papa John’s maintains a sizable corporate portfolio. As of the end of Q2, there were 679 domestic company-run stores and 2,745 franchised units (Papa John’s has an additional 1,788 international units). The company’s corporate store unit count declined by 30, year to date. Papa John’s sold 31 restaurants to franchisees. The franchise system has opened 44 and closed 79 restaurants this year. With the acquisitions, it comes to a decline of four year to date.

BTIG Restaurants analyst Peter Saleh said in a recent note that Papa John’s has a narrow path to sale without Schnatter’s blessing. Reuters reported in late August that the chain hired Bank of America Corp and Lazard Ltd to “help find ways to stabilize the restaurant chain.” A report last week said Papa John’s reached out to potential buyers to ask them to submit offers, and that sources said 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.

“While we recognize Papa John’s attraction as an acquisition candidate given its current turmoil and turnaround potential, we believe the likelihood for some type of strategic action is low without founder John Schnatter’s approval. We do not believe that Mr. Schnatter has any interest in selling his stake or willingly stepping away from the company, making the math on shareholder approval of such an action more difficult, though not impossible,” Saleh wrote.

He added: “we have a hard time seeing Mr. Schnatter ceding his stake or influence over the company, evidenced by media appearances, explicit statements that he is the one that should lead the company and is not going away …”

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