Media & Marketing and Real Estate & Retail

Marsh merger muddied: Federal filings show grocer wants to ponder richer offer, but legalities might prevent it

June 5, 2006

A new federal filing suggests Marsh Supermarkets Inc.'s board wants to negotiate with a second potential buyer, even though it's already agreed to be sold to a Florida private equity firm.

The original buyer, Boca Raton, Fla.-based Sun Capital Partners, says merger talks with the new suitor, a partnership between Dallasbased Cardinal Paragon Inc. and New Yorkbased Drawbridge Special Opportunities Advisors LLC, would violate the agreement already in place unless Sun Capital grants Marsh permission to enter the discussions.

And Sun Capital is not ready to let Cardinal-Drawbridge steal a dance.

That might be why the Fishers-based grocer is staking out the position that it doesn't need Sun Capital's go-ahead.

Although the grocer has not made a formal statement, Sun Capital wrote in a recent letter to Marsh's board of directors that, "We ... understand that your counsel has now taken the position that our consent may not in fact be required."

It's unknown if Marsh has gone ahead and entered discussions with Cardinal-Drawbridge. None of the involved parties would comment.

Cardinal-Drawbridge sent a letter to Marsh's board of directors April 27 saying it would like to purchase the grocer for $13.63 per share, or $108 million.

Four days later, Marsh signed a definitive merger agreement to be purchased by Sun Capital for $11.13 per share, or $20 million less. In a subsequent letter to Marsh, Cardinal-Drawbridge said it was "surprised and disappointed" that Marsh "chose instead to enter into a transaction that is clearly inferior."

Then, in a May 22 letter, a persistent Cardinal-Drawbridge insisted that Marsh's board, "under Indiana law ... is required by its fiduciary duties to consider in good faith any superior offer." It also said the merger agreement Marsh signed with Sun Capital permits the discussions.

Sun Capital, on the other hand, maintains that Cardinal-Drawbridge is just trying to get "a second bite at the apple."

Thirty companies originally showed interest in purchasing Marsh, including Cardinal-Drawbridge. To drive up the sale price, Marsh's board hosted an auction and asked each company to give its best offer. And to prevent a party from waiting in the wings and swooping in to top the winning bid by a few bucks, it required each party to sign a "standstill agreement" saying it would not make additional offers to buy the company within two years.

Cardinal-Drawbridge signed a standstill agreement, argues Sun Capital; therefore, the "fiduciary out" does not apply.

Suits and shareholders

Who's right? Every M&A lawyer in town might get a shot at answering that one.

The definitive merger agreement Marsh signed with Sun Capital says, in part, Marsh may accept any unsolicited offer that it determines "after consultation with its financial advisors, is a Superior Proposal."

Yet in another section, the agreement states that Marsh can't "waive or fail to enforce any... agreement or standstill or similar agreement to which it is a party."

"What you really have is a contract that's in conflict," said Antony Page, assistant professor at Indiana University School of Law at Indianapolis. "And I would much rather argue [Cardinal-Drawbridge's] side."

While lawyers rack up billable hours deciphering the merger agreement, shareholders are restless at the thought of Marsh's leaving $20 million on the table.

"I don't know how they can get away with [accepting the lower offer]," said Brad Leonard of Indianapolis-based BML Capital, who runs a hedge fund that holds roughly 3 percent of Marsh's Class B, nonvoting, stock. "As shareholders, we want the maximum amount of value."

Marsh would not respond to a direct question about why it initially ignored the muchricher offer, but a letter of intent the grocer signed with Sun Capital on April 27 gives a clue.

If Marsh had not signed the definitive merger agreement with Sun Capital, it was on the hook for a $5 million penalty. Given the company's dire financial condition, and the possibility that a deal with Cardinal-Drawbridge could fall through, it took the safe play.

Deal in hand

would go through with a deal. The partnership could walk after taking a closer look at Marsh's books.

Sun Capital warned Marsh of the contingency in a May 29 letter, noting that Marsh "has been experiencing dramatic declines in same-store sales" and "the Cardinal Group proposal does not take into account certain non-publicly disclosed liabilities of Marsh which we confirmed by our extensive due diligence."

Sun Capital goes on to call the "management and employees of Marsh" "seriously demoralized."

"Maybe the board reasonably thought it needed to get a deal signed right away," said Page, from the IU School of Law in Indianapolis. "If they're in a situation where they're in a rapidly deteriorating financial position, that's one more reason it might be consistent with their fiduciary duty [to accept the Sun Capital offer]."

Sun Capital also says Marsh's real estate appraisals "grossly overstate the value of Marsh's assets." If that's the case, Cardinal,

While the Sun Capital deal is for less money, some say it might be the sweetest offer Marsh can find, even if it opens discussions with Cardinal-Drawbridge.

While Cardinal-Drawbridge might be proposing a deal for $20 million more than the Sun Capital deal, Marsh will have to pay Sun Capital a $10 million breakup fee and as much as $5 million in expenses if it nixes the Sun Capital deal.

And that presumes Cardinal-Drawbridge which is known for liquidating the real estate assets of the companies it purchases, might hedge at signing on the dotted line.

Employees would also likely fare better under the Sun Capital deal, experts said.

Sun Capital "has a much better track record" of keeping companies together, said Jeff Abrams, an attorney and chairman of the corporate group at Indianapolisbased Dann Pecar Newman & Kleiman PC, who does not represent any of the interested parties.

While Sun Capital would likely put the company back on the block in several years, analysts said it's more likely Cardinal-Drawbridge would pick it apart immediately to cash in on the company's real estate value.

"All of those things have to be taken into account," Abrams said.

Some shareholders, such as Leonard, say Sun Capital is just trying to make Marsh look like a Yugo so it can buy it for a Ford Escort price.

It's counterintuitive to think a bigger offer is inferior.

"Part of me thinks Sun Capital is trying to downplay what Marsh is worth," Leonard said. "If [Cardinal and Drawbridge] are real estate investors, they probably know what the real estate is worth."

No matter what decision Marsh's board makes, somebody's likely to make a run on the courthouse.

"I would not want to be a board member at this time," Abrams said. "There will be people unhappy with whatever decision they make. And they have potential exposure to the unhappy group."

And while shareholders aren't likely to get together to approve any sale until the third quarter, Wall Street is already handicapping the action.

Shares closed at $13.20 last Tuesday, up almost 21 percent, the day the news of the Cardinal-Drawbridge offer broke, suggesting stock-pickers thought Marsh is bound to sit down with its new suitors.
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