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Luby’s shareholder seeks 4 board seats, sale or other ‘alternative’

HOUSTON Luby’s Inc., operator of the namesake 128-unit cafeteria chain, is under fire again from its largest independent shareholder, Ramius Capital Group LLC, which wants Luby’s to form a more independent board and to seek strategic alternatives for the company, including a possible sale.

Ramius Capital, which through its funds and subsidiaries holds 7.1 percent of Luby’s outstanding stock, nominated today four candidates for Luby’s board of directors, including three restaurant industry veterans with experience at Wendy’s, Baja Fresh and Fuddruckers.

In July, Ramius had called into question the oversight of Luby’s by chief executive Chris Pappas and his brother Harris Pappas, Luby’s chief operating officer. The Pappas brothers also serve as executives at Pappas Restaurants, a group of more than 70 restaurants operated under such names as Pappadeaux Seafood Kitchen, Pappas Bros. Steakhouse and Pappas Seafood House.

In a letter filed at the time with securities regulators, Ramius said it was “concerned that significant potential conflicts of interest and time commitment issues exist” because of the Pappas’ dual corporate roles. Ramius partner Jeffrey C. Smith penned the letter and said the overlap between Pappas Restaurants and Luby’s “does not represent good corporate governance."

Today, Ramius said it had notified Luby’s board that it has nominated for Luby’s board Stephen Farrar, former senior vice president of the western region of Wendy’s International Inc.; William Fox, former board chairman and director of Nephros Inc., a medical device company; Brian Grube, former chief executive and president of Baja Fresh Mexican Grill; and Matthew Pannek, former president and chief executive of Magic Brands LLC and Fuddruckers Inc.

Luby’s next shareholder meeting is scheduled for Jan. 15 in Houston.

“As Luby’s largest independent shareholder, we firmly believe the company is undervalued,” Smith said. “While we are excited about the potential growth prospects for the business, we believe the board can be strengthened to enable a higher probability of the most successful outcome.”

Ramius said its nominees would “strengthen the quality of Luby’s board by adding valuable restaurant industry and corporate finance expertise.” In addition, Ramius said it believed that its nominees “can prove valuable in helping management evaluate and execute on its new growth strategy, explore various strategic and financing alternatives to enhance shareholder value and ensure that the company is being run solely for the benefit of all Luby's shareholders.”

In July, Ramius had suggested that Luby’s explore sale-leaseback transactions for its real estate, which the investment fund valued between $206 million and $265 million. That would then provide cash to fund share repurchases and to pay stockholders a “substantial” one-time dividend. Ramius also suggested a possible sale of the company.

Just days prior to Ramius’ July missive, Luby’s had secured a $100 million credit facility to help fund restaurant development, investments in existing locations and expansion of its “culinary services” contract-feeding unit. The company also said the facility might be used for acquisitions, but it did not provide details on any pending deals.

Luby’s fourth quarter and fiscal 2007 results are expected Thursday.

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