Papa John’s surges as recovery hopes brighten amid deal with Starboard

It’s been a period of extreme volatility at pizza chain Papa John’s (PZZA) since its founder John Schnatter was forced to step down as the CEO after he made a controversial statement with racist tone. In a bid to ease the ongoing tussle with the former chief, which at one point had pushed the management to the verge of selling it, the company has clinched a deal with activist investor Starboard Value.

Under the terms of the agreement, Starboard has invested $200 million in Papa John’s – thereby slashing Schnatter’s stake in the company by 13% – and received the option to invest an additional amount of $50 million within two months. Also, Starboard will name its CEO Jeff Smith as Papa John’s chairman of the board. Meanwhile, the management lowered its full-year 2018 earnings per share outlook to the lower end of the earlier outlook that ranged from $1.30 to $1.60.

Under the terms of the agreement, Starboard has invested $200 million in Papa John’s, thereby slashing Schnatter’s stake in the company by 13%

While Smith’s appointment will curb Schnatter’s say in the board’s decisions and limit his ability to influence the board members, he will likely continue with the efforts to push his agenda. Meanwhile, a proposal submitted by the ex-CEO, soon after the Starboard deal, was reportedly rejected by the board as it did not find any merit in it.

Interestingly, all the directors excluding Schnatter voted in favor of Starboard’s proposal. Later, a statement from Schnatter hinted that he might explore the legal options available to him to counter the board. Schnatter had resigned last year, in a rather unceremonious manner, after facing widespread criticism for a series of public scandals including a racial slur during a conference call.

A revival of Papa John’s will be in the best interests of all stakeholders, for the value of the brand which most customers still find appealing and the growth prospects of the fast food industry. Once the board reaches a settlement with Schnatter, a little bit of innovation with focus on technology could bring back the company’s past glory.

With signs of a recovery emerging after the Starboard deal, Papa John’s shares jumped about 10% Monday, after plunging to a multi-year low last week. The stock has fallen 26% in the past twelve months.

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