Re: 10/25/00 - [LUB] WSJ: Online Grousing Over Luby's Escalates to Proxy Solicitation
October 25, 2000
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Online Grousing Over Luby's
Escalates to Proxy Solicitation
By AARON ELSTEIN
WSJ.COM
At first, Les Greenberg had little patience for people he thought had nothing better to do than post online messages criticizing Luby's Cafeterias, a food-services company whose stock has slumped 75% in the last three years.
In December 1999, the 57-year-old lawyer from Culver City, Calif., was defending the San Antonio, Texas, company on Internet message boards. He argued that Luby's was financially sound and its turnaround was under way.
But now Mr. Greenberg has changed his tune, expressing frustration with Luby's struggling stock and management's attempts to boost profits. He is seeking to get himself and four other dissidents elected to Luby's 12-member board in January over the company's slate of nominees.
To that end, Mr. Greenberg filed documents with the Securities and Exchange Commission last week to formalize his proxy fight. Although shareholder revolts are nothing new on the Internet, experts say this appears to be the furthest along a proxy solicitation organized over the Internet has come. They say none has ever reached the SEC stage.
Mr. Greenberg an arbitrator for the National Association of Securities Dealers, and his wife own 5,300 Luby's shares. He has attracted some prominent supporters for his cause through postings on a Yahoo! message board (quote.yahoo.com). His slate includes former Luby's vice-presidents, Davis W. Simpson and William P. Snyder; Elise Jones Freeman, daughter of company co-founder Henry O. Jones; and Thomas C. Palmer, an investment manager. Ms. Freeman owns 53,562 Luby's shares.
If the SEC approves the solicitation, Mr. Greenberg's group plans to lobby votes from other shareholders. "Without the Internet, none of this would have been possible," he says. "The members of the committee and the nominees met due to [our] Yahoo postings and information exchanged via e-mail."
Luby's officials didn't return calls seeking comment.
Founded in 1947, Luby's stock for years was a steady performer by serving up such temptations as grilled squash pancakes and bacon-cheese chopped steak sandwiches. But growth stalled in the 1990s as tastes in restaurants changed. And so too, has the company's stock and its profits despite the company's efforts to engineer a revival.
"This company has been in turnaround mode for three years," says Jeffrey Dabbs, an analyst with Kercheville & Co. in San Antonio. "Shareholders have had enough, it seems."
Traditionally, proxy fights have been organized by big, institutional shareholders disgruntled with management. The time and money involved in reaching enough shareholders to vote against management usually ruled out such crusades.
But the Internet is changing that, says James Heard, chief executive of Proxy Monitor, a New York firm that recommends how institutional shareholders should vote on corporate governance issues. "Increasingly the Internet is being used as a tool of communication among shareholders to pressure managements," he says.
The California Public Employees' Retirement System annually publishes a list on its Web site (www.calpers.org) of companies that it believes need "corporate governance reforms." And ERaider, a mutual fund that invests in the stocks of companies the fund managers deem underperforming and unresponsive to shareholders, says on its Web site (www.eraider.com) that it seeks to rally shareholders on the Internet.
Grassroots revolts traditionally are doomed unless supported by major shareholders. An effort by a former KeyCorp vice president earlier this year to boot the Cleveland banking company's chairman from the board by rallying shareholders through a Yahoo message board failed when big shareholders failed to sign on.
It is unclear whether Luby's institutional owners, such as Dimensional Fund Advisors of Santa Monica, Calif., and Pimco Advisors, Newport Beach, Calif., will be sympathetic to Mr. Greenberg's cause. Spokesmen for both firms declined to comment.
Ken Bertsch, director of corporate governance at TIAA-CREF, the big pension fund that owns about 149,000 Luby's share, has supported shareholder revolts against unresponsive management. "If there is a proposal, we'd certainly take a look at it," Mr. Bertsch says. But he declined to comment on the Luby's situation and added, "We more often than not side with management's slate of directors."
In one of the first major revolts by shareholders assembled online, a group tried last year to solicit proxies to oust executives of Coho Energy, a Dallas company that filed for bankruptcy protection in August 1999. But the group went astray of SEC rules that require investors acting in concert to formally file a document that says who they are and what the plan to do.
Coho Energy emerged from bankruptcy protection under new management, in effect bringing about the change the dissident investors wanted.
The Luby's group seems have learned from that mistake, filing properly with the SEC.
"As long as there are no material misstatements in the proxy solicitation, it seems the group has covered their tracks legally," says Alan Bromberg, professor of securities law at Southern Methodist University in Dallas. "You can be sure someone on the other side will be looking for any misstatements, of course."
Luby's reported earnings of $9.1 million, or 41 cents a share, for the fiscal year ending Aug. 31, on sales of $493 million, compared to earnings of $28.6 million, or $1.27 a share, and sales of $501 million, for the previous year.
Besides its own problems, the company is feeling pressure from an overall industry slowdown. Most restaurant stocks have fared poorly of late, with shares of McDonald's and Tricon Global Restaurants, which owns KFC, Pizza Hut and Taco Bell, both down 41% from their 52-week highs.
"One of Luby's problems is too much prosperity," says Gerald White, president of Grace & White, a New York money manager that owns 142,400 shares in Luby's. "People are feeling good economically, so they don't want to eat in cafeterias."
Luby's has had some interesting developments during its struggles. In March 1997, former CEO John E. Curtis was found dead in a motel room, which authorities ruled a suicide. Shortly thereafter, the company's longtime chairman, Ralph "Pete" Erben, retired.
Mr. Curtis was succeeded in September 1997 by Barry J.C. Parker, the former CEO of County Seat, a clothing retailer. But although Mr. Parker instituted cost-cutting programs, such as buying food from outside vendors rather than preparing it in cafeteria kitchens, revenue stagnated and profits didn't reach the levels seen before his tenure.
On Sept. 25, the company said Mr. Parker would resign. Luby's stock, which reached $21.25 shortly after he assumed the reins, was at $5.44 the day his departure was announced and closed down 25 cents, to $5.13, Tuesday on the New York Stock Exchange.
Luby's has said Mr. Parker's resignation was subject to finalizing a "separation agreement." The company has not disclosed how much Mr. Parker stands to receive, but the prospects that he will get a generous separation package doesn't sit well with the dissident committee, Mr. Greenberg says.
Among other things, Mr. Greenberg's says his group will push shareholders to approve a proposal to have CEO's awarded bonuses only when the prior year's financial performance is exceeded.
Regulatory filings show that Luby's executives and directors collectively own about 6% of the company's stock, and 34% is held by institutions, according to Bigdough.com. Mr. Greenberg says he hopes the individuals who own the remaining 60% will be sufficiently disappointed with management to vote their shares in favor of his group.
However, a slate containing people with such personal ties to Luby's might worry shareholders who seek change at the company, says analyst Mr. Dabbs. "The group needs to think outside the box. Doing things the same old way at Luby's isn't going to work."
But Mr. Greenberg says bringing back some of the people who helped establish Luby's could restore the company's fortunes. "Families have been taking their kids to Luby's for years, but now this is a company in some trouble, and we aren't going to let it slide any longer."
Write to Aaron Elstein at aaron.elstein@wsj.com
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