SPARTAN TO PAY QUARTERLY DIVIDEND

Jon Springer

GRAND RAPIDS, Mich.- Spartan Stores here said last week that its board of directors has approved a plan to begin paying a quarterly cash dividend - albeit a smaller one than Spartan's largest shareholder had demanded.

A quarterly dividend of 5 cents per common share will commence during Spartan's fiscal fourth quarter, which begins next month, the company said. Spartan had not paid a dividend in fiscal 2003, 2004 or 2005, saying it would use its cash flow to fund business improvements, make acquisitions and pay debt; and also because its bank lenders prohibited dividend payments.

But last week, Spartan announced amendments to its financing agreement allowing for dividend payments and share repurchases, provided the company meets certain standards of cash availability. The revised agreement also increased the facility to $225 million over a seven-year term from $215 million over a five-year term.

Loeb Partners, a New York-based hedge fund that late last year became Spartan's largest shareholder, had aggressively called for a 12.5-cent quarterly dividend, among other demands, to create value for shareholders.

Based on shares outstanding, Spartan's dividend would cost it around $1 million per quarter. Loeb's request would require $2.6 million per quarter.

"We don't think [the dividend] is sufficient as a means to create shareholder value," Gideon King, Loeb's fund manager, told SN last week. King declined to comment on what recourse Loeb might take, but in previous letters to Spartan's board of directors, Loeb threatened to use shareholder proposals and to sponsor board candidates in order to gain access to the company's cash flows.

In a sharply worded letter to Spartan's board of directors in early October, Loeb aggressively campaigned for Spartan to pay a dividend and commence a tender offer for a 20% share buyback at $13.50 per share - moves that it said would maximize shareholder value. Spartan stock has traded between $4.90 and $15.50 over the previous 52 weeks. Late last week, the stock was trading at $10.70 a share.

Loeb had also made repeated calls for an audience with Craig C. Sturken, Spartan's chairman, president and chief executive officer. That meeting was held in October, sources told SN.

In a statement last week, Sturken said the board recently re-examined its cash-management strategies and determined a 5-cent dividend "will not affect our commitment to, and prospects for, long-term growth and capital improvements."

"We are confident in our long-term business strategy of focusing on retail and distribution sales and earnings growth by continuing to improve our product and service offerings, improving store-level execution, constructing new stores and expanding existing stores," the statement continued. "In addition, we will focus on expanding our distribution customer base and pursuing opportunistic acquisitions of retail stores owned by our existing retail customers, as well as other operators that will further strengthen our market positions."

Earlier this year Spartan reportedly pursued an acquisition of A&P's Farmer Jack stores in Detroit, only to call off a potential deal. Shareholders including Loeb, and Towle & Co., a St. Louis-based investor holding around 6% of Spartan, indicated they were against such a deal.

Both shareholders told SN they felt the company was trading below its value.