There’s a new big cheese at Papa John’s — and embattled founder John Schnatter is not happy about it.
The pizza franchisor announced a $200 million investment from hedge fund Starboard Value Monday in a deal that places the fund’s boss Jeff Smith in the chairman seat.
The deal between Papa John’s and Smith’s Starboard Value also threatens to further loosen Schnatter’s influence over the company he founded in 1984, by expanding the board and diluting his stock.
It weakens Schnatter’s voice on the board by adding three new directors, including Smith and Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment.
The company also added a seat for Schnatter’s nemesis Steve Ritchie — who became CEO in December 2017 after Schnatter was booted over his criticisms of the NFL’s handling of football players kneeling during the national anthem.
In addition to expanding the board, the $200 million investment gives Starboard a new chunk of convertible preferred stock that stands to shrink Schnatter’s stake from 31.1 percent to about 26 percent, according to restaurant analyst Mark Kalinowski of Kalinowski Equity Research.
“It doesn’t neutralize him, but his percentage of voice on the board goes down,” said John Gordon of Pacific Management Consulting Group.
A source following the situation said the deal suggests Papa John’s may be seeking to start a sales process that could have a better chance of success with Schnatter owning a smaller stake.
Private equity firms circling the company during its recent woes were hesitant about bidding for the pizza-maker with Schnatter owning 31 percent, this person said.
Schnatter — who was removed as chairman in July 2018 when it emerged that he used the N-word during a call — isn’t expected to take the setback lying down.
The pizza slinger is evaluating his “legal remedies” over Papa John’s decision to choose Starboard’s offer over his own, according to a filing with the Securities and Exchange Commission.
Schnatter’s SEC filing describes his $250 million counteroffer as “essentially the same” as Starboard’s but at a lesser cost to the restaurant company.
Schnatter could buy more stock to boost his stake, but he faces a “poison pill” that was implemented last year to prevent him from amassing too many shares. The poison pill is set to expire in July.
Shareholders cheered the investment Monday, sending the stock up almost 9 percent, to close at $41.97.
Smith pulled off a coup at Darden Restaurants in 2014 by replacing the entire board of directors and then pushing for culinary changes, including selling more alcohol and better-tasting bread sticks at Olive Garden.
“Papa John’s has always stood for higher-quality pizza, and we believe Papa John’s has a strong foundation, with the best product in the space and a strong franchisee and customer base,” Smith said in announcing the deal.
“We see tremendous potential for the company both in the US and internationally,” Smith said.