Papa John’s International announced that it has entered into an agreement with Starboard Value LP and certain of its affiliates relating to the repurchase and conversion of all of the shares of Papa John’s Series B Convertible Preferred Stock owned by Starboard. The repurchase and conversion is expected to close on May 13, 2021.

The Preferred Shares, which were acquired by Starboard in the first quarter of 2019 as part of a $250 million strategic investment in the Company, carried a preferential cumulative dividend payable in cash at a rate of 3.6% per annum, as well as pass-through common dividends, for a total yield of approximately 5.4%. As of the date of the agreement, the Preferred Shares represented approximately 13.2% of Papa John’s outstanding common stock on an as-converted basis, and were convertible at Starboard’s option at any time into shares of common stock based on a conversion price of $50.06. 

Pursuant to the agreement, the Company will repurchase 31% of the outstanding Preferred Shares, representing approximately 1.6 million shares of common stock on an as-converted basis, and Starboard will convert its remaining Preferred Shares into approximately 3.5 million shares of the Company’s common stock. Both of these actions will be taken in return for a one-time payment of $183.9 million, with the payment based on a negotiated discount to the estimated fair value of the Preferred Shares owned by Starboard. Following the transaction, Starboard will beneficially own approximately 9.5% of the Company’s outstanding shares of common stock, and Starboard CEO Jeff Smith will remain Chair of Papa John’s Board.

President & CEO Rob Lynch says, “Since Starboard’s investment in early 2019, Papa John’s has returned to growth, reflecting the strength of our culture, innovation and operations. Starboard and Jeff’s support and leadership have been instrumental to this progress and I am thrilled to continue our partnership. Looking ahead, with the foundations of our business stronger than ever, we are now able to use our strong financial position to simplify and optimize our capital structure, supporting our long-term earnings growth and continued value creation for our shareholders.”

Jeff Smith adds, “Two years ago, Starboard invested in Papa John’s and I joined the Board because of the tremendous potential of our pizza, our brand and our team members and franchisees. I could not be happier with the progress that the team has made thus far, and I am truly excited for the future. I look forward to continuing to work with this world-class team and fantastic board.”

As a result of the repurchase and conversion, the Company’s fully diluted common stock share count will increase by approximately 3.5 million shares and Starboard’s 3.6% preferential dividend on the Preferred Shares, which amounted to $9.0 million in fiscal 2020, will be eliminated.  Elimination of Starboard’s Preferred Share dividend and the Preferred Share income allocation would have increased the Company’s earnings per diluted share by approximately $0.09 or 11%, on a pro forma basis, for the first fiscal quarter of 2021, assuming that the transaction had occurred at the end of 2020.[1] Also, in the second quarter of fiscal 2021, the Company will record a reduction to net income attributable to common shareholders of approximately $110 million as a one-time charge to equity.  This charge reflects the excess of the one-time cash payment over the carrying value of the Preferred Shares.  Assuming no further common shares are issued or repurchased, this would result in a reduction of approximately $3.00 per diluted share in the second fiscal quarter of 2021.

The transaction will be financed using cash on hand with the balance coming from the Company’s existing revolving credit facility. The repurchase of the Preferred Shares from Starboard is separate from and does not utilize any part of the Company’s existing $75 million share repurchase authorization for common stock.

The transaction was negotiated by an independent committee of the Papa John’s Board of Directors formed for the purpose of evaluating a possible transaction involving the Preferred Shares. Lazard acted as financial advisor and Hogan Lovells and Richards, Layton & Finger acted as legal advisors to the independent committee of the Board in connection with the transaction.

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