Shares of Papa John's International (NASDAQ:PZZA) surged 9% last Tuesday on rumors that the pizzeria owner may be bought out. An activist investor recently purchased stock in the company, while founder and former chairman John Schnatter has reportedly been in talks with private equity firms to help him buy back the business.

After a year of controversy, investors are desperately looking for a catalyst to propel their shares higher. However, a buyout by anyone seems exceptionally difficult and likely won't happen.

Pizza deliveryman carrying a box of pizza

Papa John's investors hope someone will deliver them some good news. Image source: Getty Images.

Pizzeria's quarterback sacked

Papa John's has suffered from a year of turmoil that began with Schnatter blaming the National Football League anthem protests for the pizza shop's poor performance during an earnings call last fall. Schnatter harshly criticized the NFL for not doing more to quell the protests by its players during the national anthem. At the time, Papa John's was the official pizza of the NFL, a sponsorship it gave up earlier this year. (Yum! Brands' Pizza Hut is now the league's official pizza sponsor.)

Because of the bad publicity from his comments, Schnatter stepped down as Papa John's CEO last December, though he retained his position as chairman of the board of directors. However, during a preparation session for an earnings call this past summer, Schnatter made comments that some perceived as racially insensitive.

Reports of those comments leaked to the press in July, reigniting the controversy. As turmoil engulfed the pizza maker once more, Schnatter resigned as chairman. However, he soon regretted the decision, as new CEO Steve Ritchie began purging Schnatter's likeness from all of Papa John's advertising and moved to oust him from his offices at the chain's Louisville headquarters. The company also terminated Schnatter's "founder's agreement" that let him serve as the chain's spokesman.

Schnatter has been fighting back. The very public and acrimonious charges in both directions have taken a toll on Papa John's stock, which lost more than half its value between December 2016 and August 2018. The potential for Papa John's to be taken over has fueled hopes that the pizza chain can gain back some of the losses.

Hope springs eternal 

Buyout speculation gained momentum last week after The Wall Street Journal -- citing anonymous "people familiar with the matter" -- said Nelson Peltz and his Trian Fund Management hedge fund were contemplating a takeover offer for Papa John's. Peltz also arranged a meeting between Schnatter and the management of burger joint Wendy's (NASDAQ:WEN) in late June to discuss a possible deal, according to WSJ. However, Wendy's backed away after the last Schnatter brouhaha.

Meanwhile, Schnatter has reportedly met with private equity firms to discuss a possible takeover of the company, though he has denied doing so. Papa John's declined to comment on the rumors.

Most recently, Legion Partners Asset Management and the California State Teachers' Retirement System (CalSTRS) have assumed near-3% holdings in the company. Legion Partners believes Papa John's could boost its share price "through strategic partnerships or improving operations as a stand-alone company," though it hasn't outlined what sort of partnerships it envisions.

A Hail Mary play

A takeover of Papa John's would be difficult to execute regardless of whether it was initiated by Schnatter or by the current management team.

For Papa John's to sell itself, it would have to overcome Schnatter's 30% ownership stake in the company. That makes his cooperation in any potential dealmaking crucial to its outcome. Considering the invective hurled between him and the board, he might not be willing to come to the table.

On the other hand, Papa John's so-called "poison pill" defense will make it difficult for Schnatter to buy the pizzeria chain. The poison pill option would immediately dilute the value of Papa John's stock if someone acquired over 15% of the outstanding shares (31% in the case of Schnatter) by allowing shareholders to buy twice the value of stock they owned as of Aug. 2 at essentially half the price.

Certainly, Schnatter could come together with Peltz, or they could approach the board with a deal from Wendy's that might satisfy everyone. For example, Schnatter supposedly wanted to know how many board seats he would control if Wendy's combined the two companies. But with the sniping that's been done by each side, it's hard to see how they will be able to cross the chasm they've created and reach a deal that might benefit all shareholders.

Rich Duprey has no position in any of the stocks mentioned. The Motley Fool is short shares of Papa John's International. The Motley Fool has a disclosure policy.