Starboard Turns to Pizza After Olive Garden Battle to Salt Pasta

(Bloomberg) -- The activist fund that wanted to add salt to the water at Olive Garden is about to dig into a turnaround at Papa John’s International Inc.

The embattled pizza chain, mired in a sales slump and trying to keep its distance from controversial founder John Schnatter, is taking a $200 million investment from Starboard Value LP and adding the fund’s Chief Executive Officer Jeffrey Smith to its board as chairman.

As part of the deal, Steve Ritchie, the CEO of Papa John’s and a former Schnatter protege, is also joining the board. He’s been running the restaurant chain since the start of 2018, when he replaced Schnatter following an uproar over comments the founder made about the NFL’s national anthem protests.

Starboard’s cash infusion comes after Papa John’s board, which had been evaluating strategic options, including potentially seeking a buyer, turned down a similar investment deal from Schnatter himself, who owns about 30 percent of the company.

Papa John’s removed Schnatter, the longtime face of the brand, from its ads and sought to limit his role since last summer, when he resigned as chairman after admitting to using a racial slur.

Starboard Turns to Pizza After Olive Garden Battle to Salt Pasta

Starboard has experience in the restaurant space. In 2014, it successfully replaced 12 directors on the board of Olive Garden owner Darden Restaurants Inc. That proxy fight included a nearly 300-page Power Point presentation that called for several specific changes at the Italian-dining chain, including adding salt to the water when cooking pasta.

Starboard Turns to Pizza After Olive Garden Battle to Salt Pasta

Smith took over as chairman of Darden before a new CEO was appointed and the company embarked on an effort to improve its lagging performance that included spinning off its real estate portfolio.

Bleak Sales

Now, Starboard will try to mount a turnaround at Papa John’s. News of the investment comes as the pizza chain also reported preliminary results for the fourth quarter that missed analysts’ estimates. The company had already been suffering from a sales decline before the latest controversy began last summer.

Papa John’s plans to use the proceeds to repay debt and invest in the business, it said in a statement. Starboard is making its investment through the purchase of new convertible preferred stock, and the deal includes the option of an additional $50 million investment.

Shares of Papa John’s gained as much as 13 percent to $43.60 in New York trading Monday. the biggest intraday gain since July 12.

Besides Smith, the board added another independent director -- Anthony Sanfilippo, former chairman and CEO of Pinnacle Entertainment Inc. With the additions, including Ritchie, the board now has nine directors. Schnatter remains on the board. He voted against the decision to take the money from Starboard, according to a source with knowledge of the matter.

“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,” Olivia Kirtley, a member of the special committee that initiated the review, said in a statement.

In a filing, Schnatter said he made a similar offer to the board over the weekend, but with reduced costs to the company and with an additional $10 million to be made available to qualified franchisees. He said the board rejected his proposal and he was “evaluating the legal remedies" available as a result.

‘Got a Plan’

Ritchie, in an interview, said the company is focused more on helping sales instead of franchisee assistance this year, and that executives will offer more details on Feb. 26.

“What’s most important is sales, and we feel like we’ve got a plan.”
In the months following Schnatter’s July departure as chairman, speculation has swirled around the struggling pizza chain, with reports that Wendy’s Co. had evaluated a takeover bid. But any kind of transaction wouldn’t be easy without the backing of Schnatter, because of his hefty share stake.

After the controversy erupted, the board adopted a poison pill to prevent him from adding to his stake or gaining majority control.

Starboard Turns to Pizza After Olive Garden Battle to Salt Pasta

But those attempts failed to help results. Papa John’s systemwide same-store sales in North America, a key performance metric, fell 8.1 percent in the fourth quarter, preliminary company data show. Analysts projected a drop of 6.3 percent, according to Consensus Metrix. Internationally, that measure likely dropped 2.6 percent, the company said in unaudited results, compared with estimates they would grow 0.1 percent.

Starboard has also previously mounted activist campaigns at Yahoo Inc., Symantec Corp. and other companies. Starboard has recently taken a stake in pharmaceutical giant Bristol-Myers Squibb, according to people with knowledge of the matter.

As for its turnaround at Olive Garden, Starboard ultimately gave up on the salt idea, according to the Wall Street Journal. Adding salt to the pasta water threatened to void the warranties on Olive Garden’s pots.

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