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The battle for the institutional investor base has begun. After a group of activist hedge fund managers lashed out at Houston cafeteria operator Luby's Inc. earlier this month, the company has launched its own campaign to rein in its institutional investor base, and the message is stability, commitment and expansion.
Luby’s, an operator of 130 cafeteria-style restaurants in Texas, late Tuesday launched its own campaign, hoping to maintain control of the company's destiny, in response to a proxy contest launched by global activist fund Ramius Capital Group LLC on Oct. 17 to nominate four director candidates to the company’s 10-person board. Luby’s board has the “necessary depth and breadth of expertise” to be successful because it is made up of “veterans of restaurant management and public company leadership,” according to a proxy statement issued by Luby’s to its shareholders. The filing also pointed out that Christopher Pappas, Luby’s president, and Harris Pappas, his brother, both have increased their personal financial stake in Luby’s, demonstrating their commitment to make sure its shares improve in value. According to the proxy statement, the two Pappas brothers invested an additional $11.2 million in Luby’s as a result of exercising stock options granted in 2001, increasing their ownership stake to 24% from 17% of shares outstanding. “No one has more at stake in Luby’s than Chris and Harris Pappas, and your board is extremely pleased with the company’s progress under their leadership and with their continued commitment to Luby’s,” the filing reported. Luby’s also plans to invest more in existing restaurants, expand a culinary contract service business and build between 45 and 50 new stores, based on a new prototype, over the next five years. The New York-based hedge fund’s proxy contest is the second step in a public campaign for change launched by Ramius on July 30 when the activist fund sent a letter to Luby’s board and president outlining grievances the activist fund manager has with the operation of the company. “As the largest independent shareholder of Luby's, we believe that the company is undervalued and we are concerned that both management and the board of directors have not taken appropriate action to unlock the intrinsic value of the company,” Ramius wrote. The Ramius group also expressed concern about the privately owned Pappas restaurant entity owned by the two brothers. “As shareholders of Luby's, we are extremely concerned that the time commitment associated with running the Pappas restaurant entities, which are privately owned by you and your brother Harris, is preventing Luby's management from taking the steps necessary to unlock value at Luby's,” the Ramius group wrote. “While we are sympathetic to the difficulty of managing both businesses, the shareholders of Luby's are not interested in the Pappas restaurant chain.” While Luby’s board has restaurant experience, so does the Ramius slate. The hedge fund managers are nominating Stephen Farrar, a senior vice president at Wendy’s International Inc.; William Fox, a consultant and formerly a chairman at an investment fund; Brian Grube, former chief executive of Baja Fresh Mexican Grill; and Matthew Pannek, who served as CEO of Magic Brands LLC and Fuddruckers Inc. between May 2006 and August 2007. According to the filing, Ramius owns a 7.1% Luby’s stake. — Ron Orol Ron Orol is a Washington-based reporter for The Deal and author of Extreme Value Hedging: How Activist Hedge Fund Managers Are Taking on the World. Categories Deal Video
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