Papa John’s engages advisors for potential sale as board battles founder

24 August 2018
by Anastasia Donde, Paunie Samreth and Tanvi Acharya 

Papa John’s International, the publicly traded pizza franchise company, has enlisted Bank of America and Lazard to pursue strategic alternatives including a possible sale, according to two sources familiar with the situation.

The move comes as members of Papa Johns’ board clash with the company’s namesake founder and former chairman John Schnatter, who is trying to regain control of the business after resigning last month. The firm is also facing a potential leverage covenant breach after lowering its earnings forecast earlier this month.

A third source referred to the search for a sale as an extension of the poison pill strategy adopted by the board last month, intended to prevent the founder from seizing control. The company has tried to sell itself in the past but did not generate enough interest from potential suitors, including private equity firms, said another source.

Schnatter resigned in July amid criticism for using a racial slur during a conference call in May. In the ensuing weeks, however, he sued the board, regained a director seat and is now arguing that the current management team is incapable of running the company.

He remains a major shareholder, holding roughly 30% of the company’s USD 1.35bn market cap, according to public filings.

“I am a principal shareholder, I’m the founder and I’m a director, so I have plenty of say of what goes on and what doesn’t go on,” Schnatter told CNBC earlier this month.

The sale process hasn’t formally launched yet, the first source said. As for potential buyers, Wendy’s has looked at the company in the past, and Restaurant Brands, which owns Burger King, Tim Hortons and Popeyes Louisiana Kitchen, has also been rumored as a possible suitor.

Papa Johns generates roughly USD 172m of EBITDA and its stock was trading at USD 43 per share this morning, according to Yahoo Finance, making for an 11x valuation multiple given the company's USD 579.4m debt load.

Papa John’s last tapped the capital markets a year ago to raise a USD 400m term loan A and USD 600m revolver, arranged by JP Morgan. It currently has USD 385m outstanding under the TLA and USD 194.4m under the revolver, according to filings

The company’s revenue fell to USD 835.3m in 1H18, from USD 884m in 1H17. Net income nearly halved over the same period, dropping from USD 51.96m to USD 28.53m.

Papa John’s has a 4.5x leverage covenant, giving it roughly a turn of headroom based on leverage of 3.4x as of 1 July.

However, the company lowered performance in its 2Q earnings release earlier this month and warned of a potential covenant breach.

“Based on our revised lower financial forecast, we plan to work with the banks within our credit facility to evaluate options with the covenants to mitigate the possibility of violating a financial covenant in the future,” the company said in its second quarter filings.

Spokespeople for Papa John and Bank of America declined to comment. Lazard did not respond to inquiries.