When Marsh Supermarkets Inc. put itself on the block in November, the company's stock dove. When it cut future executive compensation $28 million a month later, the stock continued falling. When it terminated 25 executives and closed two groceries and six convenience stores, shares slipped yet again.
Nothing, it seemed, could stop the downward spiral.
Then a footnote appeared in the Fishers-based company's fiscal third-quarter financial report Feb. 21. It said an appraisal showed the company's real estate was worth from $100 million to $150 million more than listed on financial statements.
The company's stock shot up immediately.
Two months later, the Boca Raton, Fla.-based private equity firm Sun Capital Partners signed a letter of intent to buy the 75-year-old company for $88 million. The per-share price is $11.13, nearly double where the stock was trading at its January low.
Analysts say the footnote was the key to getting Sun Capital to sign on the dotted line.
"Retail ... deals have a couple of things going for them that a lot of other kinds of [acquisitions] do not," said Danielle Fugazy, editor of New York-based Buyouts magazine. "One of them is real estate."
Private equity firms bought 71 U.S. retailers last year and have already scooped up several big names this year, including the grocery chain Albertson's, Sports Authority and Burlington Coat Factory.
One of the biggest drivers of each deal was valuable real estate-which essentially gives the private equity firms a safety net in case they fail to turn the companies around.
Send in the suits
Marsh owns 34 of its supermarkets and 44 of its Village Pantry stores. It leases another 83 supermarkets and 110 convenience stores.
Analysts say they think Sun will first focus on reinvigorating Marsh's supermarkets, returning them to profitability. But if that fails, the company might still make a tidy profit by auctioning off its real estate holdings.
"Sun's model is to pick up things that are in distress and turn them around," Fugazy said.
That strategy could include selling assets that aren't hemorrhaging cash, in order to focus on the core supermarket business. While that business is struggling, it might have the most potential.
"[Sun Capital] wants to keep what is undervalued," said Matthew Will, associate dean of the business school at the University of Indianapolis.
Some observers say that might mean the Village Pantry convenience store chain will go on the block. Others say Marsh might sell its seven McNamara flower shops and its catering business.
The grocery stores have been losing market share to Wal-Mart, Kroger and other rivals. Sales in comparable grocery and convenience stores, excluding gasoline sales, declined 1.4 percent in the most recent quarter compared with a year earlier.
"There's probably a good core business in there," said Bob Shortle, managing director of locally based investment firm Periculum Capital Corp.
But there could be dramatic changes.
"They're not going to just go in and run the store the way it was run," Fugazy said.
Underperforming stores might close. Hours could be slashed. Inventory could change. Staff levels might drop. Prices could go down.
New stores also could open.
For instance, in 2003 after Sun Capital acquired Burlington, Vt.-based Bruegger's Bagels, the country's second-largest bagel chain, it purchased two bagel shops with single locations-Outland Bagels and Alpine Bagels. Last year, it purchased Garden Fresh Holdings, a soup-and-salad restaurant chain that operates Souplantation and Sweet Tomatoes.
"They're buying all of these bagel places and planning on putting them together in order to make a bigger brand," Fugazy said.
Even if Marsh grows, it probably will have fewer executives, observers say. And the executives running the business may no longer have the Marsh name.
Supermarket News reported last week that Ron Marshall, former CEO of the Minneapolisbased grocery retailer and distribution firm Nash Finch, is in line for a top executive post at Marsh after the deal closes. That might mean longtime CEO Don Marsh and other top brass are on the way out.
Sun might not replace division heads, however, Will said. Daniel Cross and Charles Barnard Jr., for example, recently switched positions and are now the presidents of the Village Pantry and supermarket divisions, respectively. That swap probably wouldn't have happened if Sun expected to dismiss them.
But nearly all the company's 15,000 jobs could disappear if Sun turns to Plan B and sells the company's real estate.
"[Real estate] can be a backstop for value," said Laurens Goff, principal of New York-based Hampshire Equity Partners, a private equity firm that invests in smaller retailers.
Sun officials won't discuss their plans for Marsh until the purchase closes in several months.
But private equity firms typically use a range of strategies to reap outsized returns, often from the low teens to more than 30 percent annually.
The firm's fourth equity fund, Sun Capital Partners IV LP, formed one year ago. It sought to raise $1 billion, but ended up attracting $1.5 billion.
"For Sun to be able to raise as many funds as it has raised and to continually increase its fund size, investors must feel very good about them," Fugazy said.
Sun does not disclose its investors, but Fugazy said it has previously attracted money from the likes of DuPont, Goldman Sachs, the Massachusetts Institute of Technology, the University of Notre Dame, the Ford Foundation and Yale University.
Such funds typically cash out investments within a set time frame, usually no more than seven years.
That means the clock is ticking on squeezing a profit out of Marsh and putting the cash back in the hands of investors-not the easiest feat considering Marsh lost more than $13 million in just the last two quarters.
A low-ball offer?
Sun may have gotten off to a good start by buying the company on the cheap. Some Marsh shareholders say that because of Marsh's real estate holdings alone, the company should fetch a much richer price.
"The price is terrible," said Brad Leonard of Indianapolis-based BML Capital, who runs a hedge fund that holds roughly 3 percent of Marsh's Class B, non-voting, stock.
Sun could return Marsh to profitability by whacking executive overhead, Leonard said. And that's before considering the value of real estate.
In its 2005 annual report filed last June, Marsh listed the combined value of its land and buildings at $238 million.
Simple math: If the real estate is worth $100 million to $150 million more than that-anywhere from $338 million to $388 million-and the company has $200 million in debt, Sun Capital's getting a pretty good deal buying it for $88 million.
Another large shareholder, who requested anonymity, was "baffled by the price" and said Marsh could "easily be worth $15 per share, just from the real estate."
Both hope a second buyer emerges, although under the letter of intent Marsh signed, it agreed not to seek other suitors.
The University of Indianapolis' Will said it's possible another company will come forward, anyway.
"That's what happened with Boston Scientific," he said, referring to the Massachusetts company that outbid Johnson & Johnson to buy Guidant Corp. "This could turn into a bidding war if someone thinks [Marsh] is worth more than $88 million."
Other possible suitors probably were waiting to see if Marsh would file bankruptcy, which would have provided an opportunity to buy assets piecemeal, Will said. Now that there's an offer on the table, potential suitors probably are reviewing the numbers to see if trumping Sun makes sense.
"Companies like [Pittsburgh-based] Giant Eagle and [St. Louis-based] Schnucks typically wait until companies approach and enter bankruptcy," Will said. "That's when you get it the cheapest."
A Giant Eagle spokesman said the company is not interested in acquiring Marsh. Schnucks did not return a call for comment.
The fact that Marsh shares are hovering around the $11.13 a share Sun offered, however, might suggest Wall Street doesn't see another buyer in the wings.
At least one real estate insider, who requested anonymity, questioned whether Marsh's property could fetch as much as the appraisal suggested.
Grocery-store locations aren't always easy to lease or sell. A former Safeway in Fall Creek Place, for example, has been empty several months. It's hard to find tenants looking for more than 30,000 square feet, especially new grocery tenants. The market's saturated.
Some Village Pantries also could be tricky to sell, in part because the locations tend to be smaller than newer convenience stores.
Bryan Chandler, a principal at Indianapolis-based Eclipse Real Estate who completed Marsh's real estate appraisal, would not share a copy with IBJ. Neither would Marsh.
But Will said it's plausible that Marsh's real estate does have hidden value. Accounting rules require companies to put a depreciated value for real estate on their books.