INDIANAPOLIS - It hasn't turned into a bidding war yet, but competing offers for Marsh Supermarkets here have at least escalated to a full-blown financial catfight.
Less than a month after Marsh agreed to be acquired by an affiliate of Sun Capital Partners, Boca Raton, Fla., for about $88 million, another bidder has proposed offering nearly $20 million more. Real estate investor Cardinal Paragon, Dallas, and a fund called Drawbridge Special Opportunities Advisors, an affiliate of New York-based Fortress Investment Group, have jointly proposed to offer $13.625 for all of Marsh's shares, or $2.50 per share more than the $11.125 offered by Sun. Marsh has not yet sought shareholder approval for either deal, but its board has backed the original, lower offer, and said it has not yet been swayed to support the other offer.
In a series of letters to the struggling supermarket chain, the competing suitors have engaged in heated arguments while raising questions about Marsh's legal and fiduciary obligations and the true value of its holdings, which include 115 supermarkets and the 154-unit Village Pantry convenience-store chain.
After Marsh put itself up for sale last year with Merrill Lynch as its financial adviser, the company received more than 30 bids through an auction process, according to a letter from Sun Capital that Marsh filed with the Securities and Exchange Commission last week.
A Marsh spokesman referred an inquiry by SN to the company's filings with the SEC, as did a spokesman for Sun Capital. Neither Cardinal nor Drawbridge could be reached for comment.
Sun Capital laid out some conditions under which it would agree to allow Marsh to consider the new proposed offer, but Marsh said it rejected those conditions based on the fact that it already had agreed to a $10 million breakup fee. It would also owe Sun Capital up to $5 million in additional reimbursement.
"The question is, does Marsh want to pay $15 million for the possibility of getting $19.8 million more from the new offer?" said Matthew Will, associate dean at the University of Indianapolis School of Business.
He also pointed out that Sun Capital's bid might have included other incentives for Marsh to accept it, such as a pledge to preserve the Marsh name or to retain jobs.
"The ball is squarely in the court of [Chairman and Chief Executive Officer] Don Marsh," he said.
The Marsh family owns a controlling interest in the chain, but several large institutions also own shares.
ABC Financial, Toronto, which has about 385,000 shares of Marsh stock, said it considered Sun's bid too low and was encouraged by the second offer from Drawbridge and Cardinal.
"All you needed was an enterprising group to take a good look at the company to decide that the sum of the parts was greater than the whole," said Irwin Michael, portfolio manager, ABC, in an interview with SN.
He suggested that the Village Pantry division could be spun off, and the supermarket operations alone could be worth the higher offer.
"If a company has a $100 million market cap and more than $1.75 billion in sales, there's got to be some hidden value there somewhere," he said. He added that Marsh is "really a real estate company" with ownership of the land and buildings at 34 supermarkets and 44 convenience stores.
"I think there are diamonds in the rough here," he said, noting that additional bidders could step in. "We're appreciative of the process of supply and demand, and let's see what level the water rises to."
Marsh's stock rose above the price of the earlier bid on the news, to nearly $13, but not to the level of the second offer, indicating investors may expect more bids, but not as high as the new proposal.
Sun Capital argued in its letters that the Drawbridge-Cardinal group - which it refers to as an "inappropriate interloper" - should be obligated to honor the "standstill" agreement it signed on March 13 in which bidders agreed not to make any additional efforts to acquire the company for two years.
"During the auction process, the Cardinal group had every right to pursue a merger with Marsh, including by submitting the same proposal it is now asking Marsh to consider," Sun wrote in a letter dated May 26. "It would be fundamentally unfair to allow the Cardinal group to reopen the bidding process with an untimely and quite possible illusory offer."
In addition, Sun claimed that Marsh may have hidden liabilities and that its real estate was overvalued.
"There is little likelihood that the Cardinal group can deliver the value they are dangling before you," Sun wrote. "Because they performed limited due diligence during the auction phase, the Cardinal group proposal does not take into account certain non-publicly disclosed liabilities of Marsh which were not refuted by your financial advisors. It is also clear to us à that the real estate appraisals grossly overstate the value of Marsh's assets."
In the Drawbridge-Sun letters to Marsh, the group repeatedly refers to Sun Capital's offer as the "inferior" bid and makes clear that its suggested offer would be better for shareholders. It also appears to have made an offer before Marsh unveiled its agreement with Sun Capital. In a letter dated April 27, Drawbridge and Sun proposed the $107.8 million bid, five days before Marsh agreed to the $88 million offer from Sun Capital.
On its website, Cardinal lists among its history of financing deals a sale-leaseback transaction of A&P's distribution centers. It also lists prior financing deals with Shaw's, 7-Eleven and the now-dissolved distributor Fleming Cos.
