Filed On 7/30/07 9:01am ET · SEC File 5-10635 · Accession Number 1193805-7-1929
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
7/30/07 Ramius Capital Group LLC SC 13D 4:29 Lubys Inc E-Data Systems Inc/FA
C4S & Co., L.L.C.
Jeffrey M. Solomon
Morgan B. Stark
Parche, LLC
Peter A. Cohen
Ramius Capital Group, L.L.C.
RCG Starboard Advisors/LLC
Starboard Value And Opportunity Master Fund Ltd.
Thomas W. Strauss
General Statement of Beneficial Ownership · Schedule 13D
Filing Table of Contents
Document/Exhibit Description Pages Size
1: SC 13D General Statement of Beneficial Ownership 22 69K
2: EX-99.1 Joint Filing Agreement 1 6K
3: EX-99.2 Power of Attorney 1 6K
4: EX-99.3 Letter From Rcg 5 21K
EX-99.3 · Letter From Rcg
| EX-99.3 | 1st Page of 5 | TOC | Top | Previous | Next | Bottom | Just 1st |
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[LOGO] RCG STARBOARD ADVISORS, LLC
July 30, 2007
Christopher Pappas
Luby's, Inc.
President, Director and CEO
13111 Northwest Freeway Suite 600
Houston, Texas 77040
cc: Board of Directors
Dear Christopher,
RCG Starboard Advisors, LLC, a subsidiary of Ramius Capital Group, L.L.C.,
together with its affiliates, currently own approximately 6.5% of Luby's, Inc.
("Luby's" or "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. While we applaud the improvement in
restaurant operations over the past six years, we believe a significant amount
of untapped value resides in Luby's real estate holdings. Over the past few
months we have made several attempts to meet with you and the rest of Luby's
management team to discuss our ideas for enhancing shareholder value, but
Company representatives have repeatedly informed us that members of management
are too busy to meet with us.
Therein lies one of our chief concerns with Luby's corporate practices. 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. While we are sympathetic
to the difficulty of managing both businesses, the shareholders of Luby's are
not interested in the Pappas restaurant chain. We are interested in Luby's. As a
public company, management has a fiduciary responsibility to work with the Board
of Directors to maximize value for all shareholders.
With the value of Luby's real estate, potentially exceeding its current
enterprise value, we believe value can be maximized in one of two ways: 1)
execute a sale leaseback on a substantial portion of the owned real estate with
a coincident stock buyback and special dividend or 2) sell the Company for a
price that reflects the full value of the Luby's concept and the associated real
estate in order to maximize risk adjusted returns for shareholders. 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 consideration. Also,
when considering the value of the Luby's concept and related cash flow, we
believe the business could attract a significant premium in a competitive sale
process.
[LOGO] RCG STARBOARD ADVISORS, LLC
After conversations with several real estate and sale leaseback experts, we
believe that Luby's real estate is worth between $206 million and $265 million
pre-tax in a sale leaseback transaction. This represents between 91% and 117% of
the Company's current enterprise value.
================================================================================
($ in millions)
Sale Leaseback Transaction Low High
======================================================== ======= =======
Owned Properties 93.0 93.0
Average Revenue per Property 2.52 2.52
------- -------
Estimated Revenue on Owned Properties $ 234.0 $ 234.0
Estimated Rent Expense 7.5% 8.5%
------- -------
Rent Payed $ 17.5 $ 19.9
Cap Rate 8.5% 7.5%
------- -------
Real Estate Value $ 206.5 $ 265.2
Shares Outstanding 26.2 26.2
================================================================================
Real Estate Value per Share $ 7.89 $ 10.14
================================================================================
--------------------------------------------------------------------------------
Source: Estimates based on RCG Starboard internal projections.
We believe Luby's stock price of $9.66 per share as of July 27th, ascribes
little to no value to the Company's real estate. Additionally, the current price
does not, in our view, fully value the cash flow or growth strategy of Luby's as
is evidenced by the 6.8x multiple of latest twelve months ("LTM") EBITDA.
Upon executing a sale leaseback transaction, we estimate that Luby's will have
net cash after taxes of between $208 million and $244 million. We believe that
the Company should use between $100 million and $150 million in cash to do a
large buyback and pay a substantial one-time dividend. We believe the remaining
cash from the sale leaseback transaction and the Company's significant debt
capacity should then be used to fund management's recently disclosed restaurant
expansion strategy. We believe this strategy will create the most value for
shareholders and will leave the Company with sufficient cash to grow. Assuming
the Company is able to repurchase shares in a Dutch auction tender offer at a
20% premium to the current market price, this buyback would retire approximately
33% to 49% of the current shares outstanding.
After completing the sale leaseback transaction, stock buyback, and special
one-time dividend, we believe Luby's stock could trade at a valuation more in
line with comparable public companies. Based on analyst next twelve months
("NTM") consensus EBITDA estimates of $37.9 million, and assuming the Company
pays between $17.5 million and $19.9 million of market rent post sale leaseback,
Luby's pro-forma NTM EBITDA would be between $20.4 million and $18.0 million.
Although we believe there is no justification for the discount currently
ascribed to Luby's shares, using a 10% discount on the high end of the comps
below and the current NTM EBITDA multiple on the low end, Luby's could trade for
between 6.0x and 6.2x NTM EBITDA.
[LOGO] RCG STARBOARD ADVISORS, LLC
[Enlarge/Download Table]
=========================================================================================================================
COMPARABLE STATISTICS ($ in millions)
Market Enterprise EBITDA Enterprise Value / EBITDA LTM EBITDA NTM* Rev
Company Name Cap Value LTM NTM* LTM NTM* Margin Growth
------------ --- ----- --- ---- --- ---- ------ ------
Darden Restaurants $5,952.0 $6,624.8 $ 805.3 $ 817.6 8.2x 8.1x 14.5% 6.0%
Brinker International 3,061.7 3,582.9 564.3 537.5 6.3x 6.7x 13.1% 5.8%
Bob Evans Farms Inc. 1,083.1 1,260.2 178.8 181.3 7.0x 7.0x 10.8% 5.8%
CBRL Group Inc. 951.5 1,644.9 278.3 242.1 5.9x 6.8x 10.3% (9.8%)
O'Charley's 428.0 567.2 94.3 109.4 6.0x 5.2x 9.5% 4.6%
Denny's Corp. 384.1 796.2 120.7 104.6 6.6x 7.6x 12.3% (7.1%)
------------------------------------------------------------------------------------------------------------------------
Average 6.7x 6.9x 11.7% 0.9%
========================================================================================================================
Luby's, Inc. 252.6 227.1 $ 33.5 $ 37.9 6.8x 6.0x 10.4% 2.0%
* Estimates per Capital IQ, as of July 27, 2007 and RCG Starboard internal
estimates.
Source: Market data per Bloomberg and Capital IQ as of July 27, 2007. Luby's,
Inc. NTM EBITDA estimate is fiscal year 2008 estimate.
With the execution of the aforementioned changes, our analysis below
demonstrates that Luby's shares could be valued in a range of $13.11 per share
to $15.57 per share. This represents between a 36% and 61% increase from the
current stock price.
[LOGO] RCG STARBOARD ADVISORS, LLC
================================================================================
($ in millions)
Step 1: Sale Leaseback Transaction: Low High
=================================== ======= =======
Real Estate Value $ 206.5 $ 265.2
Estimated Taxes @38% (a) (24.4) (46.7)
------- -------
After Tax Real Estate Value $ 182.1 $ 218.5
Net Cash on Balance Sheet 25.5 25.5
------- -------
Net Cash after Sale Lease Back $ 207.6 $ 244.0
Step 2: Stock Buyback:
===================================
Current Stock Price $ 9.66 $ 9.66
Buyback Premium 20.0% 20.0%
------- -------
Stock Price for Buyback $ 11.59 $ 11.59
Cash Used for Buyback $ 100.0 $ 150.0
Shares Acquired During Buyback 8.63 12.94
Remaining Shares After Buyback 17.53 13.21
Step 3: Special One Time Dividend:
===================================
Value of Dividend $ 42.6 $ 29.0
Step 4: Company Valuation:
===================================
Consensus NTM EBITDA (b) $ 37.9 $ 37.9
Market Rent from Sale Lease Back (17.5) (19.9)
------- -------
Pro Forma NTM EBITDA $ 20.4 $ 18.0
NTM EV / EBITDA Valuation Multiple 6.0x 6.2x
------- -------
Implied Enterprise Value $ 122.1 $ 111.7
Net Cash After Buyback 65.0 65.0
------- -------
Implied Market Cap $ 187.1 $ 176.7
Pro Forma Shares Outstanding 17.53 13.21
Implied Stock Price $ 10.67 $ 13.37
================================================================================
Implied Stock Price Including Dividend $ 13.11 $ 15.57
================================================================================
--------------------------------------------------------------------------------
Source: Estimates based on RCG STARBOARD internal projections.
(a): Tax Base estimated by adding the land at book value and the buildings
as a % of net PP&E from 10Q filed on June 15, 2007.
(b): NTM EBITDA estimate is fiscal year 2008 estimate.
While we believe a sale lease back transaction and the distribution of capital
can unlock significant shareholder value, the value of the Company's shares
could continue to trade below their intrinsic value as long as there is
perceived management conflict or distraction. We are concerned that significant
potential conflicts of interest and time commitment issues exist for certain
members of management and directors of Luby's who are also employed by, or
otherwise affiliated with, your Pappas restaurant entities. This does not
represent good corporate governance. While you may be able to manage through
[LOGO] RCG STARBOARD ADVISORS, LLC
your conflicts of interest, we believe it is imperative for you to surround
yourself with a wholly disinterested Board and management team that can render
independent judgment and ensure that any future potential conflicts of interest
between Luby's and Pappas restaurants are evaluated with the best interests of
all of the Company's shareholders in mind.
We note below just a few of the current time commitment issues and potential
conflicts of interest for certain members of Luby's management team and Board:
o Frank Markantonis, a member of Luby's Board, has served as an
attorney for many years for the Pappas restaurant entities and his
principal client throughout his legal career has been Pappas
Restaurants, Inc.
o Mr. Markantonis' step-son, Peter Tropoli, serves as a Senior Vice
President, General Counsel and Secretary for Luby's and has provided
legal services to the Pappas restaurant entities.
o Luby's current financial and accounting advisor and former Chief
Financial Officer, Ernest Pekmezaris, also serves as the Treasurer
of Pappas Restaurants, Inc.
o Additionally, we note that the new Chief Financial Officer, Scott
Gray, served as Internal Auditor at Pappas restaurants prior to
joining the Company in 2001. It is unclear whether he retains any
current conflict.
We firmly believe in the value of Luby's. Management and the Board cannot just
accept the current state because of past accomplishments but rather are duty
bound to maximize value for shareholders today. We strongly urge you to take
prompt action to unlock the inherent value of the Company's real estate holdings
to highlight the strong free cash flow generation ability of the Luby's
franchise, while improving corporate governance and minimizing conflicts. The
Board should immediately engage a strategic advisor to assist the Company in
either a sale leaseback transaction or a sale of the Company. There is a
significant opportunity to unlock value at Luby's. We look forward to working
with senior management and the Board to meet that objective.
Best Regards,
/s/ Jeffrey C. Smith
Jeffrey C. Smith
Partner
Ramius Capital Group
Dates Referenced Herein and Documents Incorporated By Reference
| Referenced-On Page |
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| This SC 13D Filing | | Date | | First | | Last | | | Other Filings |
|---|
| |  |
| | 6/15/07 | | 4 | | | | | 10-Q |
| | 7/27/07 | | 3 |
| Filed On / Filed As Of | | 7/30/07 | | 1 |
| |
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