• by Thom Forbes  @tforbes, February 5, 2019

With a $200 million investment in hand, Starboard Value CEO Jeffrey Smith is becoming chairman of the board of the beleaguered Papa John’s pizza chain. The Papa John’s board turned down a rival bid by its founder and former chairman and CEO, John Schnatter, that reportedly matched -- or bettered -- the New York-based hedge fund’s offer.

“It’s fitting that Papa John’s International Inc. got a lifeline the day after the Super Bowl. Founder John Schnatter’s complaints about the NFL, after all, were the first signs the pizza chain was in deep trouble,” Mark Gongloff writes for Bloomberg Opinion.

“Back in 2017, Schnatter blamed kneeling football players for his company’s sagging pizza sales, because shut up, that’s why. The company had to scramble to clean up that mess, only for Schnatter to step in it again by using the ‘n’ word during a conference call to, no lie, talk about PR strategy. Papa John’s tried to clean up that mess too, including distancing itself from Schnatter,” Gongloff adds.

Starboard’s investment will bring Schnatter’s stake in Papa John’s down from roughly 30% to around 26%, a source tells CNB.com's Lauren Hirsch and Amelia Lucas.

“When Schnatter heard about the proposed deal Saturday, he sent the board his own proposal with similar terms, according to an SEC filing. In addition to a $200 million investment with the option to invest $50 million more in the future, Schnatter offered a lower dividend rate and limited voting rights for the new shares. The special committee rejected the offer,” they write.

Why Smith over Schnatter, who started selling pizza from a converted broom closet in the back of his father’s tavern in Jeffersonville, Ind. in 1984? The hedge fund honcho’s gustatory credentials include an 18-month stint as chairman at Darden Restaurants’ Olive Garden, where he led efforts to improve breadstick quality control and to consider adding salt to the pizza dough (but nixing the idea because it could void the warranty on its pricey pots, as the Wall Street Journal’s Julie Jargon and David Benoit write.) 

Starboard’s sales -- and Darden’s share price -- zoomed as a result.

“Credit for the success is shared. People who worked at Darden before Starboard’s arrival say the investment firm helped propel cost cuts, spurred creativity and steered the chain closer to its core business of serving customers looking for a good deal on Italian food,” Jargon and Benoit report.

Given that history, Bloomberg’s Sarah Halzack says she’s “optimistic about what Starboard can do with its slice of Papa John’s” in a piece published by the Washington Post, even though Starboard will only hold sway over two other seats on the board. Anthony Sanfilippo, former chairman and CEO of casino operator Pinnacle Entertainment, is joining the board and Papa John’s CEO Steve Ritchie is ascending to it from within.

“It is enough of a change that it should help the beleaguered pizza chain turn the page on a dark chapter. As I’ve noted before, Papa John’s was struggling well before the Schnatter controversy flared. Its marketing and menu both needed an overhaul, and these are the kinds of problems Starboard can help it address. (The company said about half of the proceeds of the firm’s investment will be used to pay down debt, with the rest going toward advancing strategic priorities.),” Halzack writes.

“This has been a fun due diligence process for me and my office,” Smith tells the Wall Street Journal’s Julie Jargon in an interview. “We’ve been bringing in Papa John’s pizza and rivals’ pizza and doing taste tests in our office several times a week.” 

Papa John’s won the taste tests, Smith says.

“Of course there are opportunities for cost efficiencies. But our goal here is not to come in and cut costs; it’s to make the company stronger for shareholders and the whole organization,” Smith tells Jargon.

Ritchie carries some baggage of his own.

“Ritchie became CEO of Papa John’s in January 2018 after Schnatter caused a separate public relations maelstrom by referring to the NFL’s handling of player protests as a ‘debacle,’” Noah Kirsch writes for Forbes.

“Ritchie, who had already run day-to-day affairs at Papa John’s for years, featured prominently in a series of Forbes reports last summer detailing a toxic culture at the company. Numerous current and former employees claimed he turned a blind eye to harassment and misconduct and that he helmed an insular band of executives who received special treatment and were sometimes prone to inappropriate behavior. Both Ritchie and Papa John’s have denied those allegations,” Hirsch adds.

But Ritchie has also been praised, as Scott Mautz does here in Inc., for leading  “sincere effort to begin the healing and recovery process.” 

That could prove to be the chain’s secret sauce.