John Schnatter, founder of the pizza chain Papa John's (NASDAQ: PZZA), stepped down as chairman following the highly controversial use of a racial slur in a media-training conference call with the marketing agency Laundry Service.
Schnatter had used a derogatory term towards African Americans during a call with the company's marketing agency back in May. Apparently, during a role-playing exercise, Schnatter insisted that KFC founder Colonel Sanders had never faced an outcry for using the term. Though Schnatter claimed he used the word only to make a point, Laundry Service cut ties with the pizza provider. After a Forbes article detailing the incident broke the news, Schnatter apologized and stepped down amid public and shareholder outrage.
In a statement about the board accepting his resignation, Papa John's said it would appoint a new chairman in the coming weeks.
This development comes hot off the trail of another controversy surrounding Schnatter last year, when he made questionable remarks about the NFL protests against police brutality. Schnatter complained that the NFL had failed to stop black players kneeling during the national anthem, which hurt advertisers' sales. Schnatter's comments lead to a huge backlash on social media, and he eventually stepped down as CEO.
Analysts at Stifel recently wrote, "we believe whoever owns the company will need to fully rebrand Papa John's, requiring more than just advertising and packaging changes to alter consumers' perception."
"A critical factor for the company or a potential buyer is determining the level of investment and duration needed to stabilize sales and profitability and return the company onto a growth path," they added.
Schnatter alleges Laundry Service had provoked him into using the term and then tried to blackmail Papa John's for $6 million to keep quiet about it, in a television interview that aired on Friday. Laundry Service disputed his comments in an internal memo sent to employees Tuesday, calling his claims "disparaging and outrageous."
The talks regarding a potential merger between Wendy's (NASDAQ: WEN) officials and Schnatter, who still sits on the board and owns 29% of Papa John's, were preliminary and began before he stepped down as chairman last week over the use of a racial slur, according to sources. The talks, which Papa John's board was aware of, have cooled since the incident.
Shares of Papa John's were up 4.6% in recent trading, while Wendy's shares rose 1.9%.
The deal talks underscores the opportunity potential acquirers see in improving Papa John's technology and scaling up in a still fragmented pizza chain industry. While the PR scandal is likely to complicate the deal, Papa John's has taken prompt and swift action to correct its mistakes and there should not be any long-term cost to the company. In fact, under Wendy's, the pizza chain could undergo major restructuring and new management that is better equipped to deal with such situations.
There's also the issue of hearing Schnatter's side of the story, which his representative Patricia Glaser is hoping to bring to light in the form of a tape. "If there's a tape, let's hear it," Glaser said. "We believe it will vindicate John, and we want to know if it exists."