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BEHIND THE NEWS: Big backer of Marsh cashes in millions in grocer's shares

January 9, 2006

The Cincinnati investor that has helped back Marsh Supermarkets Inc. for more than two decades quietly unloaded a big chunk of its shares just before Christmas.

American Financial Group Inc., an insurer controlled by the family of billionaire tycoon Carl Lindner, sold 255,686 Marsh shares for nearly $2.4 million Dec. 21 and Dec. 22, a filing with the Securities and Exchange Commission shows.

American Financial officials did not return calls, but market observers say the move suggests the insurer thinks the Indianapolis-based grocer will have a hard time finding a buyer for the whole company at an attractive price.

The fretting is warranted, analysts say.

"Fundamentals worsening," reads the headline to a recent Goldman Sachs analyst report. "Don't expect sale process to unlock value."

Indeed, Marsh's Class A and Class B shares have moved the wrong direction since the company announced Nov. 29 that it had hired Merrill Lynch to explore options, including a sale.

Both classes of Marsh stock were trading late last week at around $8.75, off about 25 percent since the company said it would explore a sale. The decline has cut the company's stock market value to $69 million.

American Financial's pre-Christmas sales were wholly out of character. It previously hadn't sold Marsh shares for more than two years, and those sales were small by comparison.

Even so, it still has a lot of skin in the game. The sales cut its ownership of Class A voting stock from 19 percent to 15 percent. Including nonvoting Class B shares, its ownership fell from 16 percent to 13 percent.

Raiding the Pantry?

Goldman Sachs analyst John Heinbockel doesn't think the company's 119 groceries will enamor potential buyers.

"In light of the challenging operating environment and the business' limited strategic value-it is a small, not especially profitable company in a secondary market-we would be surprised if there was meaningful interest in the asset," he said in a report.

Marsh's 160-store Village Pantry convenience store chain is another matter, Heinbockel said.

Illinois-based consultant Bill Bishop agrees. It's not that the convenience store business is less competitive, he said. It's that that industry is in an earlier stage of consolidation, and thus has a larger field of potential buyers.

Still, the VP business, which accounted for 17 percent of the company's $1.7 billion in revenue last year, is hardly without blemishes.

In its own SEC filings, Marsh notes that Indiana liquor laws bar the sale of cold beer except at taverns and liquor stores, wiping out a lucrative source of profit enjoyed by stores in other states.

In addition, some VPs look run-down, putting them at a competitive disadvantage to spiffier rivals. The contrast is stark between the VP on the southwest corner of 86th Street and Ditch Road, for example, and the recently remodeled Speedway on the northeast corner. The Speedway is so busy it often has four employees working, while the VP sometimes has just one.

A buyer from up north?

Don't be surprised if Quebec-based Alimentation Couche-Tard swoops in to buy the Village Pantry chain.

Convenience Store/Petroleum News

reported last month that the Canadian company is negotiating to purchase that business, citing an unnamed source.

Alimentation Couche-Tard-which translates into "food for those who go to bed late"-has been growing rapidly through acquisition and now ranks behind only 7-Eleven in store count.

Couche-Tard and Marsh officials did not respond to requests for comment.

Couche-Tard already is a major player here, thanks to its 2001 purchase of Columbus, Ind.-based Johnson Oil Co., operator of 225 Bigfoot convenience stores.

Just days before Marsh announced it had hired Merrill Lynch to explore options, Couche-Tard CEO Alain Bouchard told Canada's Financial Post that his company was negotiating to buy a chain in an undisclosed part of the United States with 150 to 200 locations. He said the chain was in an area where Couche-Tard already operates.

"That [deal] will take at least six to nine months" to complete, he told the newspaper. "It's a very long process, in the early stages. [The sellers] have to convince themselves about some things," he said, without elaborating.
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