Schnatter, who has been in the news this month for using a racial slur, stepped down as chairman of the board of Papa John's last week but remains its largest shareholder. The Journal noted that sources said the talks were held before this latest controversy involving Schnatter.
Wendy's and Papa John's declined to comment. The talks have not progressed since Schnatter admitted last week having used a racial slur on a conference call in May, according to The Journal.
The news of the reported merger talks perked up shares of both companies. Wendy's shares rose almost 2 percent Wednesday, while Papa John's were up 4 percent.
Papa John's, based in Louisville, Ky., is the third-largest pizza chain in the world and has more than 3,300 stores in the U.S. Wendy's is the third-largest burger chain in the world and ninth-largest U.S. restaurant chain; it has more than 6,000 stores. Wendy's market capitalization — the value of the company in the stock market — is more than twice that of Papa John's.
Papa John's has struggled the past year with declining same-store sales, a key industry metric. Schnatter didn't help the situation when he complained in November that the sales decline was related to National Football League players' controversial protests of police shootings of blacks, given that the company has been a major NFL sponsor and advertiser. Schnatter resigned as chief executive earlier this year; he said this week he regrets having stepped down from his chairmanship last week.
Because of the tumult in the company, it comes as no shock to one observer that Schnatter would have been out looking for a buyer.
"It looks like a fire sale. I'm sure he's pitched it to everyone," said Bob Welcher, president of Restaurant Consultants Inc. "Strategically (for Papa John's), it's obviously something they have to do."
Another observer, Jonathan Maze, executive editor at Restaurant Business Magazine, believes Papa John's will be sold.
"Schnatter's actions seem to be pointing Papa John's firmly in the direction of a sale," Maze wrote in a story published Tuesday. "Indeed, it's increasingly evident that a sale could be the company's only way out of its current mess."
Wendy's has a history of picking up other concepts. It bought Tim Hortons in 1995 and Baja Fresh in 2002. In 2008, Wendy's was merged with Arby's after activist investor Nelson Peltz bought the company, but Arby's was spun off in 2011. Peltz remains Wendy's largest shareholder and the board chairman.
Buying Papa John's is too risky for Wendy's after Schnatter's recent controversies, Welcher said.
"The problem is the company is tainted." he said. "How do you dissociate from the figurehead? He is that pizza, he is that product, he is that brand."
A deal would make sense if Wendy's planned to diversify its portfolio or had hoped to invest in new lines of business. As Chipotle found with burgers, pizza and Asian food, it is really hard to create a concept from the ground up.
"It's a safer move to buy an existing company," Welcher said. "Wendy's would think long and hard about it, but it's not a clean situation, and they have a lot to overcome."
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