LOEB TO SPARTAN: ACT NOW

Jon Springer

GRAND RAPIDS, Mich. -- In a letter sharply critical of Spartan Stores' board of directors and management, New York-based investor Loeb Partners aggressively resumed its campaign last week to convince the retailer-distributor here to consider selling all or parts of the company or slash capital expenditures and pay a dividend.

Loeb's call for action acknowledged industry speculation that Spartan was considering making an acquisition of Farmer Jack stores and/or had put itself up for sale, and harshly criticized the company for its silence on either possibility. "The management and board should tell it like it is, and inform shareowners of the steps they are taking to maximize value," the letter said.

Loeb's tactics are indicative of a trend toward so-called activist investing, in which hedge funds or other opportunistic investors aggressively call for management and strategic changes to quickly increase the value of their holdings. Such strategies have been inspired by an increased flow of money into hedge funds unafraid of getting their hands dirty digging for value, and by swashbuckling financiers such as Carl Icahn, who is currently lobbying along with hedge funds for strategic shake-ups at Time-Warner, sources said.

"The increasing role of what I call catalyst investors is probably the hottest phenomenon in the corporate governance front right now," Patrick McGurn, executive vice president of Institutional Shareholder Services, Rockville, Md., told SN. "I was talking to one investment banker who said there were 200 specific instances this year of hedge funds taking a significant stake and agitating for changes in strategy."

According to Securities and Exchange Commission documents, various funds associated with Loeb today own around 6.4% of Spartan stock, making it Spartan's largest shareholder. In the letter published last week, Gideon King, the fund manager, said Loeb would consider nominating candidates for Spartan's board and pursuing other shareholder proposals unless the company details a strategy to maximize value. "The choice is clear: Pay out all or a large part of your cash flow and/or sell parts or all of your company, or be doomed to the declining value trap status," King wrote.

The letter suggests that Spartan's retail business could be sold for around $130 million and its distribution division for $230 million, resulting in a per-share valuation of $14. Loeb also urged a halt to a capital expenditure plan it called "ugly."

Spartan stock has traded as high as $15.50 over the last year but more recently was trading below $10.

The letter strongly criticized Spartan's chief executive officer, Craig Sturken, for allegedly ignoring Loeb's suggestions: "The company has never asked us to come to their headquarters and understand why their responses to our ideas suggest a state of catatonic ignorance of a path to value creation."

But Spartan told SN last week that it was listening. "We are aware of Mr. King's issues in the company. The company is taking them under consideration," said Jeanne Norcross, a Spartan spokeswoman.

And another Spartan investor contacted by SN painted a different picture of Sturken and a slightly different vision for the company.

"We've never had a problem visiting management. We visited with Mr. Sturken and he was most accommodating," Peter Lewis, director of research of Towle & Co., a St. Louis-based investor holding around 6% of Spartan, told SN. "Maybe if you're going in with guns blazing you might not get the same reception."

Like King, Lewis expressed reservations about Spartan pursuing an acquisition of Farmer Jack, and agreed with King that the company has traded below its value. But he disagreed with King's notion that it was necessarily the right time to force changes, saying the turnaround plan begun by Sturken, including making capital investments in new stores, still had benefits to offer.

"You can sell it now for $13, $14 or $15 a share, or you could work a few years, grow the top line, get more efficiencies from scale and maybe sell it then for $15, $16, $17 or $18," Lewis said.

Lewis added he felt part of the reason Spartan was trading below value was because management had been quiet regarding speculation of a larger strategy. Though Sturken in a conference call earlier this year indicated the company would not make a large acquisition, some analysts and observers believe it remains a suitor for Farmer Jack, the Detroit chain for sale by A&P that Sturken previously led. Spartan has also declined to publicly confirm or deny a report it had retained an investment bank to pursue a potential sale of the company.

"There's been all these rumors flying around and there hasn't been any news one way or the other. Not a 'yes, we're considering it,' or a 'no, we're not considering it,"' Lewis said.

Whether Spartan management is able to ultimately decide its fate -- or its fate is decided for it by activist investors -- may come down to how many investors are convinced by Loeb's rattling, sources said.

"How do you handicap the likely success of this? Watch the shareholder base," McGurn said. "If you see a lot of the loyal long-term investors taking the money and running and replaced with hedge funds, arbitragers and special situations guys, then the chances of success of the activists tend to go up exponentially."

And as hedge funds increase in number and size, and competition for investments sharpens, it is likely other supermarket companies could become targets of such aggressive investors, added Gary Giblen, an analyst for Brean Murray, New York.

McGurn said the issue calls for public companies to maintain strong corporate governance and communication with shareholders.

"You don't want to give people a reason to look to your company and say, 'They're not friendly to shareholders.' Having a strong outreach effort before these folks end up on your doorstep is one of the keys."