MARSH FILES SUIT TO CLARIFY OBLIGATIONS

MARK HAMSTRA

INDIANAPOLIS - Marsh Supermarkets here has filed a lawsuit to find out if it can negotiate with new bidders in its effort to sell itself.

In filings with the Securities and Exchange Commission, Marsh said it is asking for a court ruling on whether its $88 million merger agreement with an affiliate of Sun Capital Partners, Boca Raton, Fla., prohibits it from considering a new proposed bid from Dallas-based real estate developer Cardinal Paragon, for about $108 million.

In addition, Marsh has asked Hamilton Superior Court here to rule that the lawsuit itself is not a violation of its merger agreement with Sun Capital, and to compel Sun not to withdraw its bid based on the suit, which names the Sun affiliate and the new bidders as defendants.

"You've got a bride walking to the altar with Sun Capital, but as she's walking down the aisle she's looking on both sides to see if there's a better groom," said Matthew Will, associate dean at the University of Indianapolis School of Business. "And, as she's looking for new grooms, she wants to make sure that this current groom is banned from leaving."

Marsh filed the suit shortly after issuing a press release stating that it had rejected the second offer, which it was required to do based upon its agreement with Sun. However, it is now looking to the courts to determine if indeed it can begin talks with Cardinal and its financing partner, Drawbridge Special Opportunities Advisors, an affiliate of New York-based Fortress Investment Group.

Marsh also filed its proxy statement related to the merger last week, which revealed that the company and its financial advisor, Merrill Lynch, received preliminary interest ranging from $7.50 to $18 per share, primarily from financial bidders.

Four of those financial bidders and one strategic bidder, who was not identified, were selected to participate in a final round of bidding. After reviewing confidential financial information about Marsh at this stage of the process, two of the financial bidders dropped out, while the strategic bidder declined to participate further, citing other obligations.

Although Marsh has not disclosed what the bidders may have found that discouraged them from proceeding further, Sun said in a letter filed with the SEC that its due diligence discovered that Marsh's assets were overvalued and its liabilities were understated.

"Lease terms would be a reasonable guess for underreported liabilities," Will said.

Meanwhile, Cardinal Paragon floated in and out of the bidding at various times during the process with different strategic and financial partners, initially proposing an offer in the range of $11-$13 per share, which was seen as too low at the time. It came back with an offer of $18-$20 per share before its most recent proposal to offer $13.625 per share.

Another financial buyer also expressed interest in buying Marsh for an enterprise value - debt plus equity - of $330 million, which "may have represented a per-share value of $14.75," Marsh said in its proxy filing. That buyer, which teamed up with Cardinal at one point and reviewed Marsh's confidential information, then said it was prepared to offer only $10.47 per share.

Although Sun Capital initially offered only $10 per share, it increased the offer to its current level of $11.125 per share after Marsh was able to allay some of its concerns, Marsh said.

In recommending that shareholders accept Sun's bid, Marsh noted that Sun was unwilling to allow Marsh to entertain the Cardinal proposal, that it could be forced to reimburse Sun up to $15 million if it did entertain new bids and that there was no guarantee that any bidder would offer more than Sun had once they had done due diligence.

Marsh also noted that Sun was capable of financing the acquisition itself, while Cardinal was relying on outside financing.

Marsh operates 69 traditional Marsh supermarkets, 38 price-impact LoBill Foods stores, eight O'Malia Food Markets and two Arthur's Fresh Markets, mostly in central Indiana. It also has a 160-store convenience-store chain, Village Pantry. The company is publicly traded but substantially owned by the founding family.