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Marsh Agrees to Buyout Deal

Posted on: Friday, 21 April 2006, 21:00 CDT

By Madhusmita Bora And Erika Smith, The Indianapolis Star

Apr. 21--After six months of struggling to find a buyer, local grocer Marsh Supermarkets said late Thursday that it is close to a deal.

Sun Capital Partners, a private equity firm based in Boca Raton, Fla., has signed a letter of intent to buy Marsh for $88 million, or $11.125 a share.

Marsh officials declined to comment on the buyout offer, leaving unclear whether the deal would affect operations at Marsh, LoBill, O'Malia's and Village Pantry stores, or whether some of the stores or divisions would be closed or sold.

Sun Capital couldn't be reached for comment.

But experts say Sun Capital is known for coming in fast, buying struggling companies in myriad industries, investing needed capital and trying to right them. In doing so, the firm often slashes underperforming segments, builds up others and sells them, and fires the top bosses.

That could mean the end of Marsh family control of the company after 75 years. It is not known whether the Marsh family tradition of contributing to charities across Indiana will be preserved.

Despite the uncertainties, local experts familiar with Sun Capital were upbeat about the purchase. Sun Capital made the first public offer on Marsh, despite speculation that the grocer could be bought by a larger supermarket chain or go out of business.

"Rather than having a liquidated Marsh, we are going to have a company that's going to come in and turn it around," said Matthew Will, associate dean for the University of Indianapolis' School of Business. He said he was convinced that Marsh was headed for bankruptcy.

Marsh has been struggling to cope with high debt and weak sales and has been trying to turn itself around after several difficult years. The grocer has seen a dip in same-store sales for three straight years. Its market share has dwindled with the rise of discount giants such as Wal-Mart and specialty retailers like Wild Oats and Trader Joe's.

In February, the company fired 25 employees, including four high-ranking members of the founding family, and said it was closing a Fort Wayne supermarket and several smaller stores.

Will said Sun Capital could be the savior Marsh has been seeking. The regional grocery chain could see a turnaround in two years if Sun Capital is successful, he said.

Will said the process could go like this, if Sun Capital's track record at other companies is an indication:

First, the equity firm would take the company private.

Second, it would bring in a team of three to four executives, eliminate the top management and let lower-level managers run much of the operation.

Third, Sun Capital would look for places to cut costs. That could include closing underperforming stores or laying off employees.

Fourth, it would work at improving the profitability of the company division by division, and sell them off as they improve.

Fifth, the equity firm would sell Marsh after earning a profit for at least two years. "We're talking a three-, five-, seven-year window before they sell it," Will predicted.

Private equity firms like Sun Capital generally don't look to remain long-term owners but have other goals.

"From what I understand, it is either to raise the stock price and sell it, or divest it," said Professor Theresa Williams, director of the Indiana University Center for Education and Research in Retailing.

But William Schoenholz, an attorney and leveraged-buyout specialist with the Los Angeles firm of Buchalter Nemer, said the strategies for firms involved in such buyouts are not easy to forecast.

"It's hard to predict what this could mean," he said. "It could provide a much stronger financial resource than the troubled ownership that was forced to sell it in the first place."

Those scenarios, he said, could include a turnaround to preserve the company and jobs. Or, the "acquisition could be made and then it could be broken into several pieces and sold off," Schoenholz said.

Sun Capital is unlike many financial buyers because it purchases companies while they still have value, opting to turn them around quickly instead of breaking them apart and selling them quickly, Will said. Some private equity firms tend to swoop in only when a company is on its knees.

For some buyers, the traditional thinking is to wait as long as possible and pay as little as possible for a company, Will said. Sun Capital's thinking is: Don't wait that long. A company may be mismanaged, but it still has value. With the right management, such a company can be profitable again.

"They buy a company early enough that they still have good sales, just not profit," Will said.

In buying Marsh before it's in the death throes of liquidation, Will said, Sun Capital is saving a business that's the eighth-largest employer in the state.

Still, is some respects, Sun Capital might be getting a bargain. Marsh's balance sheet put the company's net worth at $124.3 million as of Dec. 31. That's about 40 percent more than what Sun Capital proposes to pay.

"They can pay $90 million for the common stock and almost get the company for free if they borrow against the real estate that Marsh currently owns," said Atticus Lowe, vice president of California-based West Coast Asset Management, an investment firm.

Among Marsh's assets are the real estate and buildings for 34 of its 69 supermarkets, 44 convenience stores, five florist and catering facilities, and its corporate headquarters, according to filings with the Securities and Exchange Commission.

Local business leaders were hopeful Thursday evening that Marsh would keep its prominent place in the local business landscape.

"Marsh has distinguished itself as a great corporate citizen, and anything that allows it to continue to be viable would be good for our community," said Roland Dorson, president of the Greater Indianapolis Chamber of Commerce. "Marsh is woven in the fabric of our community. They are active in so many arenas."

Others said it was important that shoppers still have Marsh as a choice.

"Marsh Supermarkets is an extremely important part of the Indiana business community," said Grant M. Monahan, president of the Indiana Retail Council. "To the extent that this announcement benefits the company, helps them to remain competitive and service its customers, is of value to all of us.

"Competition is good," he added. "It's good in the marketplace for shoppers, and Marsh Supermarkets has been an extraordinarily loyal company in Indiana, and obviously we don't want to lose that."

Star reporter Daniel Lee contributed to this story.

MARSH SUPERMARKETS:

-- Ticker: MARSA.

-- Headquarters: 9800 Crosspoint Blvd., Indianapolis.

-- Executives: Don E. Marsh, chairman and chief executive; William L. Marsh, interim president.

-- Stores: Operates 69 Marsh Supermarkets, 38 LoBill Foods, eight O'Malia's Food Markets, 154 Village Pantry convenience stores and two Arthur's Fresh Markets in Indiana and western Ohio.

-- Other operations: Crystal Catering Food Services, Primo Banquet Catering and Conference Centers, Floral Fashions, McNamara Florist and Enflora Flowers for Business.

-- Employees: Eighth-largest employer in Indiana, with 13,710 employees.*

-- 2005 revenue: $1.7 billion.

-- 2005 net income: $4.2 billion.

SUN CAPITAL PARTNERS:

-- What it is: Private investment firm focused on leveraged buyouts, equity, debt and other investments.

-- Headquarters: Boca Raton, Fla.

-- Other locations: New York City, Los Angeles, London and Shenzhen, China.

-- Founded: 1995.

-- Executives: Rodger R. Krouse, Marc J. Leder, co-chief executive officers.

-- Portfolio: Sun Capital affiliates have acquired more than 115 companies. Affiliated companies include American Benefit Plan Administration, Bacharach Clothing, Bruegger's Enterprises, Garden Fresh, Life Uniform, LOUD Technologies, Musicland, Northland Cranberries, Sam Goody, Suncoast and Wickes Furniture.

-- Sales: More than $27 billion.

HISTORY OF MARSH:

[1922] Wilmer Marsh opens a general merchandise store in North Salem, Ind.

[1931] Ermal Marsh (Wilmer's son) opens his first store on West Jackson Street in Muncie. After surviving the Great Depression, it is expanded to become the first supermarket in Muncie and is renamed Marsh Foodliner.

[1952] The company incorporates as Marsh Foodliners.

[1953] Marsh Supermarkets becomes a publicly held company with a chain of 16 stores.

[August 1959] Ermal Marsh, 49, dies in a plane crash en route to Chicago from Muncie. At an emergency board meeting, Estel Marsh, Ermal's brother, is elected president. Don E. Marsh, Ermal's 21-year-old son, is handed some of his father's duties.

[1966] The first Village Pantry convenience store opens in Muncie.

[1968] Don E. Marsh is named president of the company.

[June 1974] Marsh becomes the first grocery store in the world to use scanners.

[1990] First LoBill store opens in Wabash, Ind.

[1991] Marsh unveils its "Supermarket of the Future" -- a 24-hour, seven-day-a-week format that includes a full-service pharmacy, salad bar, espresso bar, pastry shop and in-store bank.

[1994-95] The Marsh Fresh Idea Card debuts, giving customers instant discounts at the registers.

[May 2000] Marsh announces plans to purchase Ross Supermarkets, a five-store chain in Muncie.

[2001] Marsh acquires O'Malia's Food Markets.

[2002] David A. Marsh is named president of the company.

[January 2003] Marsh buys two Mr. D's Fresh Food Markets on Indianapolis' Far Southside, converting them to O'Malia's Food Markets.

[April 2004] Marsh opens its first stand-alone eatery, Trios Di Tuscanos, in Noblesville. The casual eatery's menu includes gourmet pizza, sandwiches, soups and whole rotisserie chickens. It closes in 2006.

[June 2005] Plans are approved for an Arthur's Fresh Market to be built on the site of the former Atlas Supermarket in Broad Ripple. Marsh later puts the project on hold and won't discuss details.

[November 2005] Company announces it is exploring a possible sale.

[Jan. 3, 2006] Marsh eliminates $28 million in retirement benefits that affect Chairman Don E. Marsh and five other high-level executives.

[Feb. 8, 2006] Marsh announces it has cut 25 jobs at its headquarters, including those of President David A. Marsh and three other top executives. It also plans to close eight stores in Indiana and a restaurant in Noblesville. William L. Marsh is made interim president.

[April 20, 2006] Marsh announces it has agreed to be purchased by an affiliate of Florida-based Sun Capital Partners.

Sources: Marsh Supermarkets, Sun Capital, Hoover's, Indiana Chamber of Commerce, Star archives

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MARSA,

Source: The Indianapolis Star

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