By Svea Herbst-Bayliss and Uday Sampath Kumar
(Reuters) - Hedge fund Starboard Value LP has taken a $200 million stake in Papa John's International Inc after the No. 3 U.S. pizza chain rejected a similar offer from the company's founder, John Schnatter, according to the company and a regulatory filing.
Papa John's shares, which have tumbled nearly 40 percent in the last 52 weeks, jumped 9 percent to $42 on Monday.
Starboard co-founder Jeffrey Smith will become the pizza chain's board chairman and Anthony Sanfilippo, former chairman and chief executive officer of Pinnacle Entertainment, will join as an independent director.
Papa John's CEO Steve Ritchie, who took over the top job on Jan. 1,2018, will also join the board. Schnatter, who was fired as the company's chief spokesman last year, also sits on the board. He is considering a lawsuit over the Starboard investment, according to the filing.
Starboard's Smith has earned a reputation as a savvy investor with restaurant credentials after the firm, in a boardroom coup, replaced all directors at Darden Restaurants Inc (NYSE:DRI) in 2014.
For months, Papa John's has suffered declining same-store sales and was dropped as the official pizza provider of the National Football League a year ago after Schnatter suggested that player protests during the national anthem were partly responsible for declining sales.
Schnatter, who owns about 30 percent of the company, resigned as chairman in July after Forbes reported that he used a racial slur on a media training conference call. He was also dropped as chief spokesman and the company removed his picture from its pizza boxes.
Papa John's agreement with Starboard marked a change for the activist investment firm that often initiates a push for improvements by threatening a proxy contest.
Amid the wrangling, Schnatter offered over the weekend to make a $250 million investment "on terms that were substantially similar to, but superior to, the Starboard transaction," he said in a filing on Monday.
Starboard has an option to invest an additional $50 million through March 29, 2019.
Starboard was one of only a handful of activist hedge funds to make money last year when it returned 1.7 percent, compared to an 11.3 percent loss for the average activist hedge fund,
Papa John's says it intends to use about half the proceeds to repay debt.
Reuters reported on Friday that Papa John's was seeking to sell a stake in the company after acquisition offers from private equity firms did not meet its valuation expectations.
The agreement with Starboard was in the best interests of shareholders following an evaluation of a wide range of strategic options, Papa John's said.
Papa John's expects systemwide North America same-restaurant sales fell 8.1 percent in the fourth quarter and full-year profit was at the lower end of its previous forecast.
Sales have been falling for over a year as the company battles for market share with larger rival Domino's Pizza and Yum Brands' Pizza Hut.
Papa John's is spending heavily on revamping its advertising and brand to counter the bad publicity following the Schnatter controversy.
Schnatter has been seeking internal documents to try to show the company was mismanaged and to determine if he was improperly pushed out.