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BEHIND THE NEWS: Filing throws spotlight on Marsh's topsy-turvy sale effort

June 26, 2006

What a mess. A new regulatory filing shows that Marsh Supermarkets Inc.'s efforts to sell itself unfolded in the most awkward of fashions-with rejected suitors invited back into the fray, and with potential buyers throwing out wildly different per-share values for the company, from $7.50 to $20.

At one point early this year, a special board committee of independent directors sent Dallas-based Cardinal Paragon Inc. packing, calling its "preliminary indication of interest" of $11 a share to $13 a share not good enough to stay in the running.

The Fishers-based company ultimately agreed to a deal on the low end of that range, striking a definitive agreement May 2 to be purchased by Boca Raton, Fla.-based Sun Capital Partners for $11.13 a share, or $88 million.

So far, Marsh's board is sticking with that deal, even though Cardinal, in partnership with New York-based Drawbridge Special Opportunities Advisors LLC, now is dangling $13.63 a share, or $108 million.

Confused yet? Join the club.

Marsh on June 16 filed papers with the Securities and Exchange Commission that paint the most complete picture yet of what's unfolded behind the scenes since the company announced Nov. 29 that it would explore a sale.

At first, Marsh looked as though it would have a wealth of suitors. By mid-December, adviser Merrill Lynch had contacted 27 parties. Twenty-one signed confidentiality agreements, and 10 went a step further, submitting preliminary indications of interest.

It was time for Marsh's special committee to pare the list of potential buyers, based partly on how much they suggested they'd pay. It narrowed the list to five-four financial firms and one "strategic buyer," presumably another grocery chain.

Sun made the cut, the filing says, but it doesn't say what price the Florida firm suggested it would pay at that point.

But it must have been a whole lot more than the $11.13-a-share it ultimately agreed to pay. Why? Because four days before Christmas, Cardinal-which had not been contacted by Merrill Lynch-had tried to jump in with its $11-a-share-to-$13-ashare proposal. The response: a big yawn.

"Because several parties provided preliminary indications of interest at values higher than Cardinal's ... the committee concluded that Cardinal's proposal was not competitive, and Cardinal was not invited to proceed further," the SEC filing said.

Suitors withdraw

But any headiness Marsh and Merrill Lynch felt at this point quickly vanished. By late February, three of the five finalists had dropped out, citing results of early due diligence or other projects on their plate.

In response, Merrill Lynch renewed contact with suitors that hadn't made the cut, successfully broadening the field of buyers. But by then a wrinkle had emerged-some suitors didn't want Marsh's Village Pantry convenience store division.

Merrill Lynch began contacting potential VP buyers, hoping to unearth companies that could team with grocery suitors on a bid for the entire company. But the effort fizzled, yielding just one potential VP buyer, the SEC filing said.

Cardinal returns

In March, Cardinal re-entered the fray, telling Marsh it would team with Drawbridge on a more aggressive offer, likely between $18 a share and $20 a share. This time, Cardinal got the company's attention.

Meanwhile, Sun appeared to be turning more conservative. In late March, it told Marsh it would be willing to pay just $10 a share to $13 a share. Then, on April 5, Sun executives met with Marsh CEO Don Marsh and other brass and toured stores. The get-together must not have gone well. Two days later, Sun said it would pay no more than $10 a share.

Merrill Lynch decided to hurry the process along. On April 14, it told Cardinal the Marsh board would be meeting in four days "and it would be in the best interests of Cardinal" to put forth an offer by that time.

Cardinal's response: It now thought Marsh was worth $13 a share to $18 a share, but "it had not yet refined its view as to what it was willing to pay in that range."

Then Cardinal upped the ante. According to the filing, the suitor said it would not move forward unless Marsh agreed to exclusive negotiations or agreed to cover its expenses if talks failed. On the eve of the meeting, Cardinal softened its stance but said it needed 60 days for due diligence.

By comparison, Sun nearly had completed that process, and, unlike Cardinal, it already had financing in hand. So the board on April 18 agreed to go with Sun as long as it would up its offer to $12 a share. After haggling, the parties settled on $11.13.

End of story? Perhaps Marsh and Merrill Lynch thought it would be. But Cardinal didn't give up. In a succession of letters to the company, it says it would offer $13.63 a share-$20 million more than Sun agreed to pay-and would need fewer than 15 days for due diligence.

According to regulatory filings, Marsh wants to negotiate with Cardinal. But Sun says its agreement with the grocer bars that, and it won't grant a waiver.

So Marsh finds itself headed to the altar with one suitor while it winks at another. On June 16, it asked a Hamilton County court to decide if it has the right to negotiate with Cardinal without Sun's permission. It's not clear whether a judge will weigh in before the anticipated closing on the Sun deal later this year.
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