Papa Murphy’s stock was up 20.22 percent at closing on Thursday following an announcement on Wednesday that the pizza chain has embarked on a review of possible “strategic alternatives” that include selling the business.
The Vancouver-based chain posted its third-quarter results on Wednesday along with news of the review, which is being carried out with assistance from a California-based firm called North Point Advisors. The company offered no timetable for the review or any sale decisions, and declined to comment further.
On its website, North Point touts its involvement in facilitating dozens of previous restaurant industry merger and acquisition deals involving household-name brands such as Starbucks and IHOP. Several pizza companies are on the list including Papa John’s, Round Table Pizza, Sbarro and Papa Murphy’s itself, which was sold to Lee Equity in 2010 back when it was still a private company.
North Point Advisors did not respond to a request for comment.
The third-quarter results showed some signs of improvement in terms of the company’s sales, but Chris Magana, president of Portland-based IMS Capital and adjunct professor at Washington State University Vancouver, said the rise in stock price is more likely due to shareholder interest in the announcement of a possible sale.
“When you see this happen, you get really interested because it’s a sign of confidence that management sees more value in the business than the market is willing to give them credit for,” he said. “That has investors really kind of interested to see what they will do. Will they take the company private? Will they sell to a competitor? So that’s that kind of interest there.”
Sale not a certainty
The sale possibility generates interest because shareholders wouldn’t agree to sell the business at its current price, Magana said, which has been hovering around $5 per share for the past two years. The purchasing company — or Papa Murphy’s itself, if it takes the company private — would need to make an offer at a higher value than the current stock price.
“You’ve got to give them some incentive, so in the event of a sale you’d expect the acquisition price to be 6, 7 or 8 dollars,” he said. “We’ve seen this recently with 20th Century Fox, for example — you ended up with a bit of bidding war.”
However, just because Papa Murphy’s has retained the services of a mergers and acquisition specialist does not necessarily mean the company is headed for sale, said Jonathan Maze, executive editor of the industry publication Restaurant Business. It’s possible the company will explore a sale and choose a different path, Maze said.
“It does happen,” he said.
Fiesta Restaurant Group, the Texas-based owner of the Taco Cabana and Pollo Tropical brands, for example, suspended exploration of a sale last year following the appointment of a new CEO. And earlier this year, Chicago-based Potbelly conducted a strategic review and didn’t receive an offer enticing enough to sell.
For an interested buyer to emerge for Papa Murphy’s, Maze said, they’ve got to build on the strong sales for the third quarter reported Wednesday.
“It’s really going to depend on the company’s ability to start really getting some positive traction,” Maze said. “They’ve got to start showing some positive sales.”
Two factors working against Papa Murphy’s, he said, were pricing and convenience. Several of its quick-serve pizza competitors offer pies in the $5 range, which Papa Murphy’s does not. And while Papa Murphy’s fans may favor the company’s ready-for-the-oven pies, much of America is more enamored with delivered pizza that’s immediately ready to eat, Maze said.
“The pizzas are very, very good,” Maze said of Papa Murphy’s. “The problem is you have to cook it.”
That conundrum may also help explain why the company’s performance seems to vary by geography, Magana said. The chain has traditionally done well in the Pacific Northwest where the weather tends to be cooler, but consumers in Texas likely aren’t so keen to crank up their home ovens amid sweltering outdoor temperatures.
Profits, margins pressured
An increasingly competitive casual food industry has also put Papa Murphy’s in a bind as far as pricing, Magana added, leaving it with little room to compensate for cost hikes in its own supply chain.
“People have more choice than ever, they’re looking for healthier options, and food prices continue to rise,” Magana said. “The cost of cheese, dairy, dough are all rising, and companies like Papa Murphy’s have not been able to raise prices to offset those cost increases, and that puts pressure on profits and margins.”
Following the announcement of the third-quarter 2018 results, equity analyst Andy Barish of Jefferies posted an evaluation in which he maintained a prior rating of “hold” for the company’s stock, with a target price of $6.
He noted that Papa Murphy’s sales, although still down, are starting to show signs of improvement, and online ordering is on the rise as the company continues to increase its digital presence and roll out home-delivery options.
“While these results are encouraging, we remain cautious on speed of franchisee adoption and significant competitive threats on both value and digital fronts from large peers,” Barish wrote in his report. “Brand and digital work are improvements, but competitive risk on both those fronts remains high in pizza category.”
The sale discussion caps off a tumultuous few years that have seen Papa Murphy’s struggling to stay competitive following its initial public offering in 2014. At the time, Papa Murphy’s had 1,349 franchised stores and 69 company stores, and the company said in its IPO filing that it saw potential for up to 4,500 stores in the United States.
The company’s stock trended upward in the following year, but began to decline in the second half of 2015, not long after the company opened its 1,500th store and announced that it had expanded its corporate headquarters and signed a 10-year renewal on the lease for the office.
Former Papa Murphy’s CEO Ken Calwell resigned in January 2017, having served in that role since 2011. Jean Birch, the chair of the company’s board of directors, took over as interim CEO until current CEO Weldon Spangler was appointed in July 2017. The company also hired a new chief marketing officer in February 2018 and a new chief financial officer in March.
Papa Murphy’s was originally founded in 1981 in Hillsboro, Ore., under the name Papa Aldo’s, and adopted the Papa Murphy’s moniker after merging with another take-and-bake pizza chain called Murphy’s Pizza in 1995.
