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Marsh shares swoon as sale talks drag on: Value of CEO's stake has been cut almost in half

February 20, 2006

The value of Don Marsh's stake in the Indianapolis company that bears his family's name has diminished more than $1 million a month since the company declared Nov. 29 that it was seeking a buyer.

Don Marsh, the CEO, owns almost 750,000 shares of Marsh Supermarkets Inc.'s Class A and Class B stock, making him the company's largest individual shareholder.

The price of both stocks has plummeted since the announcement, making his stake worth less than $5 million. It was valued at $8.7 million in late November.

Marsh owns 470,000 Class A shares and 277,000 Class B shares. The stocks were trading at $11.87 and $11.52, respectively, when the markets opened Nov. 29. Now, the A and B shares are fetching between $6 and $7.

Both gained slightly after the company announced a restructuring Feb. 8 that eliminated 25 headquarters jobs and closed eight underperforming stores.

Marsh officials declined to comment on the outlook for the shares, saying regulators discourage companies from making forward-looking statements.

With the swoon, the stock is trading at a steep discount to its book value. Marsh's annual report last May listed book value per share at $15.72, in part because of the company's substantial real estate holdings. That figure is the company's net worth-its assets minus its liabilities-divided by the number of shares outstanding.

Analysts, however, doubt the company can stage a sustained comeback.

"Marsh has dug themselves into so much of a hole and the competition is so fierce in many of its markets that it makes the probability they won't survive likely," said Mitch Corwin, an analyst with Chicago-based Morningstar Inc.

Corwin's research reports have listed the fair value of Marsh shares at $0.00 since November 2004, when it traded at more than $11.

"What I'm basically saying is the stock is worthless," Corwin said.

That's the same rating he had on Jacksonville, Fla.-based grocer Winn Dixie before it filed for bankruptcy protection in February 2005.

"There's a strong likelihood [bankruptcy] is in the cards for [Marsh]," Corwin said.

The company argues otherwise.

"Given the company's financial position, I don't understand why anyone would ask why we would consider [bankruptcy]," said Douglas Dougherty, chief financial officer.

He pointed out, for instance, that even though Marsh lost $3.4 million in the most recent quarter, it had positive cash flow of $13.7 million. (In the same period a year earlier, the company had positive cash flow of $20.9 million.) In addition, Marsh has $55 million in available credit, giving it some elbow room as it focuses on repairing the bottom line.

In the past two months, it's also terminated a supplemental retirement plan for top executives, cut back on travel, and taken other steps to reduce expenses. Combined, the moves will save Marsh more than $15 million annually, according to company press releases.

But it's the big debt number that trips up analysts.

Marsh Supermarkets carries $200 million in debt, about four times its stock market value of $50 million. If it filed a Chapter 11, suitors could pick off the best pieces of the company without having to assume its debt load, which costs the company more than $6 million per quarter in interest.

"As a general rule, if a buyer can acquire assets of a [company] without liabilities, that's usually the preferred course," said George Hopper, a bankruptcy attorney and principal in the Indianapolis law firm Hopper Blackwell PC.

Bankruptcy would be the worst scenario for Don Marsh and other stockholders. Typically, when companies reorganize in bankruptcy court, their stock is canceled and deemed worthless.

That's what happened after Carmelbased Conseco Inc. filed for Chapter 11 in 2002. The bankruptcy reorganization plan for ATA Holdings Corp., which goes into effect this month, also wipes out stockholders. Hardest hit will be founder and majority shareholder George Mikelsons, whose stake seven years ago was worth $235 million.

Henry Efroymson, a partner and chairman of the bankruptcy law group at Ice Miller, wouldn't speculate on whether bankruptcy is in the cards, but said one traditional sign a company is struggling is a rise in lawsuits from vendors.

In December, IBJ reported Minneapolis-based wholesaler Nash Finch Co. had sued Marsh, alleging it reneged on a contract to purchase $60 million in grocery products.

"Typically before a bankruptcy, one sees an increase in those sorts of activities," Efroymson said.

One Marsh executive has been selling shares over the past two years. Jack Bayt, president of the company's Crystal Catering Division, and his wife pocketed more than $450,000 by selling almost 35,000 shares from February 2004 to October 2005. The average sale price was more than $13.

Bayt did not return calls for comment, but Dougherty, the company's CFO, said Marsh's legal counsel signed off on each of the sales, even though Bayt was not privy to information that would give him an advantage over outside investors.

Bayt still owns almost 27,000 Class A shares and 2,200 Class B shares.

Cincinnati-based American Financial Group Inc., the company's largest outside shareholder, sold more than 250,000 combined shares of Class A and B stock Dec. 21, collecting nearly $2.4 million. It still owns 577,000 Class A shares and 478,000 shares of Class B stock.

The last board member to buy stock was James Risk, CEO of Lafayettebased Kirby Risk Corp. He bought 210 Class B shares on Oct. 13, 2005, at a total cost of $2,490. No board member has purchased Class A stock in the past two years.

The fact no directors have jumped ship doesn't necessarily mean they expect a comeback.

Executives have been barred from selling stock since the company announced it had retained Merrill Lynch on Nov. 29, spokeswoman Myra Borshoff Cook said.
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