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BULLS & BEARS: Marsh, Suros deals a study in how to value businesses

May 8, 2006

Two recent Indianapolis business deals have provided local investors with excellent case studies in business valuation. What is truly instructive is that these acquisitions are polar opposites based on the valuation methods employed and in the future expectations the buyers have for these two businesses.

They are the announced purchase of Marsh Supermarkets Inc. for $88 million by Florida-based Sun Capital Partners and the acquisition of Suros Surgical Systems for $240 million by Massachusetts-based Hologic Inc. In the Marsh acquisition, Sun Capital will assume $200 million in longterm debt, and in the Suros purchase, Hologic has committed to pay a significant additional sum based on Suros' revenue growth over the next two years.

Immediately, we see a difference in the acquisition price paid for the well-known Marsh and the upstart Suros, which makes a medical device used in breast biopsies. In the end, Hologic will pay three times more money for Suros than Sun is paying for Marsh.

The valuation difference is nothing less than stunning when comparing the deals using a simple financial statistic: price-tosales ratio. Marsh has annual sales of $1.7 billion. And while Suros is a private company, press reports accord the company with sales of $24 million in 2005. Thus, Sun Capital is acquiring Marsh for a price of 0.05 times Marsh's sales, while Hologic is paying, at least initially, 10 times Suros' sales. Hence, on a price-to-sales basis, Hologic is paying 200 times more for a dollar's worth of Suros' sales than Sun is paying for a dollar's worth of Marsh's sales.

The logical question is, why? Well, clearly, these are two very different businesses. Supermarkets are a low-margin business where, in the best of times, profit amounts to pennies on each dollar of sales. In contrast, in the medical-device field, a new product in high demand might experience rapid sales growth and earn high profit margins.

The buyers will use different strategies to earn a return on their respective purchases. Sun likely believes it can liquidate some of Marsh's real estate, reduce costs, and slim down the business to a point where it is again profitable. Sun would then hope to sell the business for a price that realizes an attractive return on the $88 million purchase.

Hologic is banking on market demand for Suros' product. It believes sales will grow fast and eventually turn into profit that justifies the $240 million price it has paid.

It is unknown at this point who has made the better deal and both purchases hold risks. Sun Capital may have paid a bargain price based on Marsh's asset values, but Marsh has been losing money and carries high debt. On the other hand, Hologic is paying a premium price for Suros' smallbut-growing sales base that may or may not materialize into adequate profits. In investing parlance, Sun is operating like a "value investor" while Hologic is behaving like a "growth investor."

Local investors will be able to watch the results of these two acquisitions unfold over the next several years. Undoubtedly, Sun's maneuvers with Marsh will be followed in the local news. And investors can follow Suros' progress in the U.S. Securities and Exchange Commission filings of publicly traded Hologic. In time, we will have a scorecard that measures the wisdom of the prices the buyers paid for these two companies.



Skarbeck is managing partner of Indianapolis-based Aldebaran Capital LLC, a money-management firm. Views expressed are his own. He can be reached at 818-7827 or ken@aldebarancapital.com.
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