Real Estate & Retail

BEHIND THE NEWS: A Marsh without Marshes? Expect family to exit soon

September 18, 2006

Marsh Supermarkets Inc. has filed hundreds of pages of documents with the Securities and Exchange Commission in recent weeks, but none gets to the crux of the matter: Will a Marsh remain atop Marsh Supermarkets if Boca Raton, Fla.-based Sun Capital Partners completes its $88 million buyout of the Fishers-based company?

Marsh spokeswoman Myra Borshoff Cook said executives haven't been asked to step down so far. "They won't know anything until the deal closes," she said.

But keeping a Marsh in the driver's seat sure sounds like a long shot. After all, Don Marsh, the chairman and CEO, is 68 and in recent months has increasingly taken a back seat to his brother William, 62, whose title is interim president and chief operating officer.

The man who once appeared to be Don's heir, his 43-year-old son David, got the boot last February during a wave of cost-cutting that also snared two other sons of Don as well as his son-in-law.

And then there are the business realities. Sun, a private equity firm, wouldn't bother buying a relatively small Midwest grocer if it were interested in the status quo. Sun's management team wants to add value and make a bundle.

As Sun wrote in a letter to the company last Spring, "Sun's track record as a private equity firm focused on operational turnarounds is second to none, particularly in the retail sector. We are supported by experienced operators who have already visited Marsh's headquarters to work on our operating plan post-acquisition."

Which brings us to a historic point. Marsh shareholders are scheduled to vote on the Sun deal Sept. 22. If the proposal passes-which even critics of the deal think is likely-it will close by the end of the month, according to SEC filings.

It's a good bet that soon thereafter, Sun will install its own leadership and-for the first time since the company's founding in 1931-a Marsh won't be calling the shots.

Don Marsh already seems to be anticipating his exit. In December, two months after the company hired Merrill Lynch to explore a sale, he tidied up language in his employment agreement giving him dibs on a portrait of his father, Ermal, that hangs at headquarters.

Under the employment agreement Don signed in 1999, if the company took down the portrait, he would have had the right to buy it for $500. The amendment says that if he leaves the company for any reason, he gets the portrait free.

His concern over cost is hard to grasp-given that his departure would trigger more than $4 million in severance payments. But everyone can relate to the sentimentality.

After all, it was Ermal who opened the company's first grocery, in Muncie. He opened nearly two dozen locations before dying in a 1959 plane crash that changed the course of Don's life.

Suddenly, the 21-year-old found himself running much of the company, a responsibility he's continued to shoulder for nearly a half-century.

Few alternatives

Sun indeed has a solid record with retail turnarounds.

For example, after buying Miles Kimball Co., a mail-order retailer of gift merchandise, in 2001, it slashed the company's costs and narrowed its focus. That allowed Sun to pocket a tidy profit when it sold the business two years later. It also resuscitated the Bruegger's Bagels chain after buying it in 2003.

But that's not why shareholders are likely to give the deal their nod. In fact, because they're receiving cash for their shares, rather than stock, their fate won't ride on the company's success or failure.

Nor is Sun's offer too lucrative to overlook. The Florida company is offering $11.13 a share, a price a shade below where Marsh shares traded for most of last year.

Rather, it's the lack of any compelling alternative. For much of the summer, another suitor had been in the wings-a partnership of New Yorkbased Drawbridge Special Opportunities Advisors LLC and Dallas-based Cardinal Paragon Inc.-dangling $108 million, or $13.63 a share.

However, after a Hamilton County judge last month ruled Marsh's deal with Sun bars the grocer from opening talks with Drawbridge/Cardinal, the partnership changed course. It signed an agreement with Sun to buy much of Marsh's real estate, then lease it back to the private equity firm.

The pact bars Drawbridge/Cardinal from making another run at Marsh without Sun's approval-effectively eliminating an incentive for shareholders to vote down the Sun deal.

The Maryland-based shareholder advisory firm Institutional Shareholder Services summed it up in a Sept. 8 report: Take what's on the table.

"The company's deteriorating performance, increasing competition and management's possible low credibility with the financial community mean that postponing a decision may further diminish shareholder value," the report said.
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