Health Care and Government and Real Estate & Retail

BEHIND THE NEWS: Another mark against Marsh: It has big pension shortfall

December 12, 2005

As if Marsh Supermarkets Inc. didn't have enough problems, here's another whopper: The company has a drastically underfunded employee pension plan-to the tune of $44 million.

That figure is disclosed deep within a Securities and Exchange Commission filing the company submitted in June. It shows the pension plan had assets of $39 million, less than half its $83 million in projected obligations.

It's a big shortfall, and one analysts say is sure to draw the attention of potential suitors. An acquirer would have to take on the pension costs, in addition to assuming the nearly $200 million in debt Marsh carries on its books.

"Any buyer would inherit those obligations. That would weigh significantly on what they would pay for the company," said Ken Skarbeck, an IBJ columnist and managing partner of Aldebaran Capital, an Indianapolis money-management firm.

Marsh announced Nov. 29 that it had hired Merrill Lynch to explore options, including a sale. Since then, Marsh shares have retreated, a sign shareholders aren't expecting the big premium typical in corporate buyouts.

The company's Class A shares on Dec. 8 were trading for $9.70, down 18 percent in the week since Marsh said it would explore a sale. Class B shares also have lost ground, shrinking the company's stock market value to $77 million.

Company officials did not respond to requests for comment.

In an SEC filing, Marsh said the pension program had applied to most of its 15,000 employees before it froze benefit accruals in 1997. (A supplemental pension plan continues for officers.) Despite the austerity move, the pension deficit swelled from $12 million in 2001 to $35 million in 2003, as projected obligations increased and the company adopted more conservative estimates for expected rates of return.

Marsh has done little in recent years to correct the imbalance. In an SEC filing, the grocer said it pumped just $368,000 into the plan in fiscal 2005 and $252,000 the year before.

"Shoring up a pension plan takes cash," said Mitchell Corwin, an analyst with Morningstar Inc. in Chicago. "If operations aren't generating enough cash, some companies won't fund their pension obligations sufficiently."

Marsh falls into the tight-on-cash crowd. In recent years, profit has been elusive. Over the first two quarters of fiscal 2006, Marsh lost $3.4 million on $959 million in revenue. In fiscal 2005, it earned $4.2 million on $1.7 billion in revenue, thanks in part to $3.8 million in gains on the sale of surplus real estate.

Amid the pressure, the company also has let slide funding for a program that shoulders some of the health care costs for retirees and their spouses.

An SEC filing says that plan has projected benefit obligations of $4.8 million, but no assets to pay them. Instead, Marsh pays those bills as they come in, spending $323,000 last year.

Avoiding bankruptcy court

Unfortunately for Marsh, it's not positioned to bargain with suitors from a position of strength.

If it doesn't find a buyer, analysts say, the company could end up in bankruptcy court, where it would shed debt and potentially even pension obligations, leaving the government's Pension Benefit Guaranty Corp. to pick up the slack.

Marsh won short-term breathing room in November, when it lined up a $95 million line of credit.

The agreement replaced an $82.5 million line that had been scheduled to be paid off in February. But still looming large are $103 million in 8.87-percent bonds scheduled to be paid off in August 2007.

In an SEC filing two weeks ago, Marsh said that New York-based Standard & Poor's Ratings Service had recently downgraded the company's credit rating, and New York-based Moody's Investors Service was likely to follow suit soon.

Those moves, according to the filing, "will potentially affect the pricing and strategy used to refinance" the 2007 bonds. In other words, the company might have to pay a higher interest rate, if it can line up replacement financing at all.

Further, the company said in the filing, the downgrades will affect Marsh's "ability to secure other financing, including leasing and payment terms from vendors."
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