Papa John's founder, John Schnatter, is reaching out to private equity firms as he eyes buying back his company

Key Points
  • John Schnatter is reaching out to private equity firms to discuss partnering to buy out Papa John's, sources tell CNBC.
  • Through a spokesman, Schnatter denied the report. 
  • Schnatter was ousted from his chairman role earlier this year when racially charged comments he made on a conference call leaked to the press.
  • Schnatter owns roughly 30 percent of Papa John's, but private equity firms are concerned about the reputation risk of partnering with him, the sources say.
Papa John's founder reportedly trying to buy back company and take it private
Papa John's founder reportedly trying to buy back company and take it private

John Schnatter is having trouble letting go.

The ousted founder of the Papa John's pizza chain has reached out to a number of private equity firms in recent weeks to discuss partnering in a bid to buy the company, sources familiar with the situation told CNBC.

Schnatter, who already owns roughly 30 percent of Papa John's, is looking for capital to help support an offer, sources said. Several private equity firms have turned him down, though, concerned about the reputational risks inherent in partnering with him. Meantime, those interested in buying Papa John's do not believe that working with Schnatter is the best path toward a winning offer, some of the sources said.

Schnatter was ousted as chairman in July, when racially charged comments he made on a conference call in May leaked to the press. Since then, he has been locked in a bitter battle with the company's board, whom he has accused of staging a coup to force his exit. The restaurant chain also adopted a defense mechanism known as a "poison pill" to prevent a hostile takeover from Schnatter or others.

A spokesman for Schnatter denied the report. 

"John Schnatter has not reached out to or had any discussions with any private equity firm or any other entity about buying Papa John's," he said in a statement. "Any such report about a potential transaction involving Mr. Schnatter is totally and completely false."

As it grapples with its public relations crisis, shares of Papa John's have fallen nearly 40 percent over the past year. The restaurant chain earlier this year hired Bank of America and Lazard as financial advisors as it looks to clean up the mess.

Papa John's shares rose Wednesday more than 7 percent after CNBC reported Schnatter's interest in buying the company.

Papa John's is actively talking with potential buyers, the sources say, cautioning a sale process is still in its early stage and may not ultimately result in a sale. It has already sent out materials about the company to potential buyers, one of the sources added.

A thorn in any sale, however, is Schnatter's stake, with potential buyers leery of purchasing a company in which he continues to be involved, the sources say. It remains unclear how Papa John's will address that issue.

Despite its public relations challenges, the restaurant remains a desirable target, should questions around its ownership be resolved, sources say. Pizza is one of the few food items that, like hamburgers, scales well internationally. With sufficient investments in technology, there may be opportunity to revive the brand to echo the resurgence enjoyed by Domino's after its own technology investments.

Challenges, meantime, include a franchisee base that is fretting over the brand's future and a company built on the back of football, as viewership of the sport declines. It also recently warned that falling sales put it in jeopardy of breaching a loan covenant, though its capital structure would likely be reworked in the event of a sale, one of the sources said.

The most likely buyers for Papa John's include Wendy's, Restaurant Brands International and Inspire Brands, which is majority backed by private equity firm Roark. The Inspire empire includes Arby's, Buffalo Wild Wings and Sonic, once its $2.3 billion acquisition of the burger chain closes later this year.

The sources requested anonymity because the information is confidential. Papa John's declined to comment.