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Luby's shareholder demands a sale or other price-boosting move

HOUSTON The largest independent shareholder of Luby's Inc. has asked management to explore a sale of the company or other strategic maneuvers to boost the value of the cafeteria operator's stock.

New York-based Ramius Capital Group LLC, which holds a 6.5-percent stake in Luby's through a subsidiary, specifically cited the possibility of a sales-leaseback of Luby's real estate, with the proceeds to be used for buying back stock and paying shareholders a special dividend. All 127 of Luby's namesake cafeterias are company-operated.

The development comes 11 days after Luby's announced that it had lined up $100 million in credit for a variety of purposes, including a possible acquisition.

In a letter delivered today to Luby's president and chief executive, Chris Pappas, Ramius raised concerns about Luby's oversight by Pappas and his brother Harris, who also run Pappas Restaurants, a group of more than 70 restaurants operated under such names as Pappadeaux Seafood Kitchen, Pappas Bros. Steakhouse and Pappas Seafood House. Harris serves as chief operating officer of Luby's and CEO of Pappas Restaurants. Chris' titles are the reverse—COO of Pappas Restaurants, CEO of Luby's. Both companies are based in Houston.

With some executives and directors of Luby's also working for Pappas Restaurants, "we are concerned that significant potential conflicts of interest and time commitment issues exist," wrote Ramius partner Jeffrey C. Smith. "This does not represent good corporate governance."

In his letter, Smith said he had hoped to air Ramius' concerns directly to Luby's executive team, but was told that "members of management are too busy to meet with us.

"Therein lies one of our chief concerns," Smith wrote.

Smith went on to say that the distraction of running Pappas Restaurants might keep Luby's management from maximizing shareholder values through such moves as a sales-leaseback of the cafeteria company's real estate. Smith estimated the value of the land at $206 million to $265 million. "This represents between 91 percent and 117 percent of the company's current enterprise value," Smith said.

With the sale and leaseback of the real estate, Smith continued, Luby's would have $208 million to $244 million in cash on hand, which could then be used to buy back shares and pay stockholders a "substantial" one-time dividend. It estimated the dividend at 20 percent of Luby's trading price.

"We strongly urge you to take prompt action to unlock the inherent value of the company's real estate holdings," Smith wrote.

But Ramius also cited the possibility of an outright sale of Luby's. "Given the available sources of financing, we believe a private equity firm could purchase Luby's at the current market price with little or no equity considerations," said Smith.

Smith's letter to Pappas coincided with Ramius' alert to the U.S. Securities and Exchange Commission that a subsidiary, RCG Starboard Advisors LLC, had amassed a 6.5-percent stake in Luby's.

Luby's had yet to reply publicly by the time of this posting to Ramius' requests and criticisms.

On July 19, Luby's announced that it had secured a five-year credit agreement for up to $100 million, to be used for renovating units, bolstering the company's menu-development efforts and possibly making acquisitions. The company said at the time that it planned to add 45 to 50 new units during the next five years.

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