Panera Accused of Bungling $7.5 Billion Sale to Help Founder

(Bloomberg) -- Panera Bread Co. investors claimed company directors bungled the $7.5 billion sale of the restaurant chain to JAB Holding Co., alleging in court documents that the business was unloaded on the cheap because the founder wanted to cash out his stake.

Disgruntled stockholders said in a filing on Monday that directors shouldn't have let Ron Shaich, who founded Panera in 1981, handle the JAB negotiations in 2017 without the assistance of a special board committee. The company also erred in hiring Morgan Stanley as the board's adviser because the investment bank had a long history of working for JAB, shareholders allege.

Under terms of the takeover, JAB paid $315 a share for Panera, which operates more than 2,000 cafes across the U.S. and Canada. Some investors sued in 2017, and there was a six-day trial in April. Delaware Chancery Court Judge Morgan Zurn has yet to rule in the case. The investors urged Zurn to find that JAB should have paid at least $46 more per share.

“The simple truth is that Panera got railroaded,'' investors said in post-trial briefs. “JAB was an aggressive buyer that insisted on one-sided terms, Morgan Stanley was an influenced financial adviser who facilitated JAB's strategy (not Panera's), and Ronald Shaich was a company founder with outsized influence and personal motivation to close the deal.”

Lawyers for JAB and Panera say objecting shareholders aren't entitled to $361 per share for their stock, but actually should receive about $12 less than investors who signed off on the $315 per share offer. The dip can be tied to subtraction of the value of business synergies created by the combination, according to the filings.

A Morgan Stanley spokesman declined to comment on the case. Tom Johnson, a U.S.-based spokesman for JAB, Wesley McDade, and Darren Brandt, a spokesman for Shaich, didn't immediately respond to requests for comment.

Buying Panera added another U.S. brand to JAB's growing retail food and drink empire. The German company already owns Stumptown Coffee Roasters, Keurig Green Mountain, Krispy Kreme Doughnuts, Jacobs Douwe Egberts and Peet's Coffee & Tea, among others. It acquired the Au Bon Pain bakery chain the same year it scooped up Panera.

JAB Expansion

JAB, backed by Austria's billionaire Reimann family, has invested in a variety of consumer-goods companies, such as cosmetics giant Coty Inc. and Durex condom maker Reckitt Benckiser Group Plc. Four of the Reimanns each have a net worth of about $2.9 billion, according to the Bloomberg Billionaires Index.

Shaich created Au Bon Pain Co. in 1981 along with a former partner. After acquiring Saint Louis Bread Co. in 1993, he changed the name to Panera. The firm became a fast-casual-dining darling of the restaurant industry, focusing on fresh offerings to appeal to health-conscious consumers. The company has also invested heavily in mobile ordering and digital technology.

While JAB's offer amounted to a 20.3% premium, some Panera investors sued in 2017 arguing Shaich rushed into the deal so he could make a bundle on his stock and retire without doing any serious evaluation of the chain's market value.

“The board never formed a special committee, delayed hiring a financial adviser, and did not receive a valuation until the day they voted on the deal,” shareholders said in the filing. “As a result, the board was uninformed, ill-prepared, and vulnerable to conflicts.”

Once they did hire an adviser, Shaich and fellow directors also acquiesced to JAB's suggestion that they add Morgan Stanley as their financial adviser on the deal, investors contend. The New York-based investment firm had a long track record of advising JAB and providing funding for its deals. That raises questions about Morgan Stanley's independence, investors alleged.

‘Many Entanglements'

“Morgan Stanley, Panera's supposedly ‘independent' sell-side financial adviser, owed significant allegiances to its long-time buy-side client, JAB,” according to the filing. “The many entanglements between JAB and Morgan Stanley were either not disclosed to the board until days before signing or not disclosed at all.”

The April trial focused on claims by four Panera shareholders, including 2017 Arlington LLC, Canyon International LLC, Short Hills Capital Partners LLC and Yellowstone Global LLC, according to court filings.

In their post-trial brief, JAB and Panera said the Delaware Supreme Court has stressed that one main factor to be weighed in determining if a stock valuation is fair is the deal price resulting from arm's-length negotiations.

Unhappy investors are wrongly asking Zurn to “disregard entirely the price negotiated by the parties and to adopt instead a fair value derived from their litigation expert's” flawed analysis, the companies argued.

The case is In RE Appraisal of Panera Bread Co., No. 2017-0593, Delaware Chancery Court (Wilmington).

--With assistance from Craig Giammona.

To contact the reporter on this story: Jef Feeley in Wilmington, Delaware at jfeeley@bloomberg.net

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Steve Stroth, Peter Jeffrey

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