Private Lives

 
March 16, 2003

On the heels of the strongest bull market in U.S. history, many might think owning a public company is every business owner's dream.

That is until they ask owners of NPC International and PJ America Inc., the two largest public franchise companies in the pizza business.

Despite compiling solid track records, investors largely ignored both firms' stock. That led officers at both companies to take their pizza powerhouses private on August 31.

Under the name Mergco, Inc., Gene Bicknell, founder and CEO of NPC International, an 834-store Pizza Hut franchisee based in Pittsburg, Kan., bought back 1,021,545 shares of common stock for $11.55 each, plus all minority holdings representing 35 percent of NPC's total stock, for about $90 million.

PJ America Inc., a 169-store Papa John's franchisee based in Birmingham, Ala., was purchased by PJ Acquisition Corp., an entity composed of the chief officers and shareholders of PJ America Inc. The company also was renamed PJ United.

The purchase price of $21.8 million included 2.49 million outstanding shares (all but 2 percent of the total remaining shares) valued at $8.75 each-$3.75 less than its original offering price five years ago.

Tim Carlin, a senior consultant at Technomic, a foodservice industry research and consultancy in Chicago, said both pizza companies, like similar small-cap restaurant companies, didn't attract investors because of their slower growth rates. Consequently, NPC's and PJ America's stock prices floundered even though both companies' posted positive reports.

NPC International

Headquarters: Pittsburg, Kan.
Stores: 834
(Fiscal year ended in March '01):
Sales: $505 million
One-year sales growth: 10.9 percent
2001 net income: $22.8 million (flat over '00)
Share price at 1994 IPO: $6.50
Purchase price at buy-back: $11.75
Market capitalization at buy-back: $11.8 million
*NPC's sales make up 13 percent of all Pizza Hut sales, and 17 percent of its total franchise sales.

"They didn't receive the amount of coverage in the marketplace they needed to really give shareholders the value they deserved," said Carlin. He called the buy-back a "win-win" for everyone involved. "The price that shareholders were offered was reasonable ... and those companies saw what they were buying as having good long-term value."

Tony Howard, vice president of research at Hilliard Lyons in Louisville, Ky., said that public franchise company stock often is perceived as second rate to the parent company's stock-even when the franchisee company's stores outperforms the parent's. (Carlin said this occurred most recently from August 2000 to August 2001, when both NPC's and PJ America's same-store sales bettered their parents by a half a percent.) Still, he added, that matters little when such companies don't appear on large investors' radars.

"It's like (investors ask), 'Why buy franchisee stock when you can buy the parent company's stock?' " said Howard, adding that franchisee company stock typically costs less than the parent company's. "The problem is that most of that's perception, which isn't always right."

PJ America chairman Rick Sherman agreed that investor inattention to small-cap companies like his is common and largely undeserved.

"Small-cap restaurant companies are generally unloved by the investing public," said Sherman, who founded PJ America along with the same investors who took the company private. "And this is a pattern I think is continuing in the rest of the industry."

Doug Stephens, president and CEO of PJ United, told the Birmingham Business Journal that his company made decisions intended to benefit PJ America in the long term, but that such choices rarely please shareholders.

"There are no long-term owners on Wall Street, only short-term renters," he said. "For us, this wasn't a 50-yard dash."

Scott Richardson, a director at Goldsmith Agio Helms, an investment baking firm that specializes in merger and acquisition services, said major investors search for companies with double-digit growth, not the numbers generated by NPC and PJ America.

"If growth is 2 to 3 percent, like you saw with NPC, that's not something Wall Street finds attractive," said Richardson, whose company was hired by NPC's board of directors to represent minority shareholders during the buy-back. "It's also not large enough to be attractive to large mutual funds and institutional investors."

But that doesn't make such an investment unwise, he added.

"From a business standpoint, a company like NPC is tremendously attractive because it generates so much cash and provides a wonderful return on invested capital," Richardson said.

Privacy Preferred

Calls to NPC International for comment on the buy-back were not returned, but both Carlin and Richardson speculate that Bicknell, like PJ America's board, will enjoy the return to the private sector. The costs and hassles associated with regular SEC filings will be gone, and the ability to make decisions for the benefit of the company-not thousands of shareholders-will allow both companies to focus on operations. Relieved of those burdens, Sherman said he'll definitely enjoy the change.

PJ United

Headquarters: Birmingham, Ala.
Stores: 169
(Fiscal year ended Dec. '00):
Sales
: $111.1 million
One-year sales growth: 16.3 percent
2001 net income:$22.8 million (flat over '00)
Share price at 1996 IPO: $12.50
Purchase price at buy-back: $8.75
Market capitalization at buy-back: $21.8 million

"As a private company, we only have to answer to ourselves and our lenders," said Sherman. "We can make decisions more quickly this way, and if we want to choose to do something for the long-term, we can."

Carlin believes the real benefits each company can expect will be derived from a restaurant market that remains strong despite the current economic downturn. He said NPC and PJ America are well run, their products are in high demand and value-priced-a winning combination investors overlooked.

"The fact of the matter is that the trends aren't changing; people are eating out more," Carlin said. "There are more dayparts to be exploited because people are working more. I think the current situation is nothing more than a mere breather before we see restaurants stocks move again."


Topics: Financial Management , Independent Operation , Public Companies


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