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Papa John's sells $200M stake in brand, names new board chair, member

A New York-based turnaround investor pumps $200 million into Papa John's and adds a new board chair and one other member to the brand's board of directors.

February 4, 2019

Papa John's International, Inc. today entered into a securities purchase agreement with Starboard Value LP, a group that works to turn what are typically considered undervalued companies around. Starboard is investing $200 million in Papa John's with the option to make an additional $50 million investment anytime between and through March 29, this year, according to a press release.

In connection with the investment, the Papa John's Board of Directors is expanding to include two independent directors, including Starboard CEO Jeffrey C. Smith, as Papa John's board chair, and former Pinnacle Entertainment Chair and CEO Anthony M. Sanfilippo. Both bring substantial restaurant experience to the brand, as well as expertise in operational turnarounds, corporate finance and corporate governance. Papa John's President and CEO Steve Ritchie has also been appointed to the board, which will now comprise nine directors, seven of whom are independent.

The announcement is the culmination of a process begun last September to study strategic options for the troubled company by a special committee, with Lazard and BofA Merrill Lynch as its financial advisors. After extensive discussions with a wide group of strategic and financial investors, the board concluded the investment agreement with Starboard was in the best interest of shareholders, according to the release.

"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," said Olivia Kirtley, previous chair of Papa John's board and member of the special committee, 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. We are excited to work with Jeff as our new chairman and look forward to welcoming Anthony and Steve to the board."

Incoming board chair Smith added, "We look forward to providing leadership, sponsorship, and support to instill operational, financial, and corporate governance best practices, and working with the Papa John's team to develop a disciplined long-term strategic plan while delighting our customers every day."

The company plans to use approximately half of the investment to repay debt, with the remaining proceeds providing a base for Papa John's to invest capital to enhance its five strategic priorities, including people, brand, value/product, technology and unit economics. 

Under the terms of agreement, Starboard is purchasing $200 million of a newly designated Series B convertible preferred stock of Papa John's. Through March 29, 2019, Starboard will also have the option, subject to certain limitations, to purchase up to an additional $50 million of Series B convertible preferred stock under the same terms and conditions as the initial investment. 

Subject to certain limitations (including limitations on the amount available for issuance pursuant to the terms of the purchase agreement), Papa John's has the right to offer franchisees who satisfy the accredited investor requirements an opportunity to purchase a total of $10 million of the Series B convertible preferred stock on the same terms as Starboard. 

The conversion price will be based on a fixed 22.5 percent premium to the 10-day volume weighted average trading price of Papa John's common stock ending February 15, 2019, subject to a floor and a cap of $34.66 and $50.06, respectively. Based on the company's closing stock price as of Feb.1 of $38.51, Starboard's initial $200 million investment would equate to approximately 11 to 15 percent of Papa John's outstanding common stock on an as-converted basis. 

The annual dividend rate of the Series B convertible preferred stock will initially be 3.60 percent, payable quarterly in arrears, and the Series B convertible preferred stock will also participate on an as-converted basis in any regular or special dividends paid to holders of Papa John's common stock. In addition, the Series B convertible preferred stock is redeemable after eight years for cash at the option of either Papa John's or the holders of the Series B convertible preferred stock. The agreement includes a lock-up provision under which Starboard may not transfer its shares for one year after closing.

For the 2018 periods:

• Systemwide North America comparable sales decreased (8.1 percent) for the fourth quarter. 
• For the full year, systemwide North America comparable sales decreased (7.3 percent), compared to previous guidance of -6.5 to 8.5 percent.
• Systemwide international comparable sales decreased (2.6 percent) for the fourth quarter.
• For the full year, systemwide international comparable sales decreased (1.6 percent), compared to guidance of negative -2 to 1 percent. 
• The company's global net unit growth was 2 percent, compared to the previous guidance of 0 to 3 percent for the year.
• 2018 adjusted diluted earnings per share — excluding the impact of restaurant divestitures and the special charges discussed in the Company's third quarter earnings release — are expected to be near the low-end of the company's previously provided range of $1.30 to $1.60. 
• The company now expects these special charges to be approximately $51 million, which is at the low-end of its previously provided range of $50 million to $60 million. 

For period December 31, 2018 to January 31, 2019:

• Systemwide North America comparable sales decreased (10.5 percent).
• Systemwide International comparable sales were flat.
• The company noted that the disparity in North America and International comparable sales reflects the consumer sentiment challenges the brand has encountered in the U.S. In addition, the December and January sales were impacted by the conversion to the company's new loyalty program and ineffective promotions in the heightened competitive environment.

"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," Ritchie said in the release. "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. Quality and how our product brings people together will be front and center in our efforts. Our recently launched Philly Cheesesteak pizza, a new line of handcrafted specialty pizzas, premium ingredients, menu variety, and new, more modern creative advertising that emphasizes people and quality products are a few actions underway."