MARSH FACES CHALLENGES IN QUEST TO FIND BUYERS

MARK HAMSTRA

INDIANAPOLIS -- Marsh Supermarkets here said competitive pressures have forced the company to consider a sale, but its biggest challenge may lie ahead: finding a buyer.

Although observers pointed out that the company has a significant market share in central Indiana and operates many strong locations, the growing strength of rival operators in the Indianapolis metro market -- combined with the plethora of other supermarket investment opportunities around the country for acquisitive companies -- may make Marsh a tough sell, they said.

"The timing, given that we're in the middle of a pretty significant sale with Albertsons, is a bit of an issue," said Neil Stern, senior partner with consulting firm McMillan Doolittle, Chicago. "Albertsons has to happen first. There are so many pieces and variations of what might happen with that one, it's a little difficult to look at a Marsh right now."

Boise, Idaho-based Albertsons, with operations throughout the country, said in September that it would seek to sell itself, and analysts have speculated that it could be broken up in chunks to multiple buyers.

Another analyst, who asked not to be identified, said the list of potential buyers is limited because of the challenges Marsh faces.

"It's going to have to be somebody with a very low cost structure, that's very well-capitalized," the analyst said, suggesting that Supervalu, Minneapolis, might be a good fit. Supervalu could not be reached for comment last week. Kroger, Cincinnati, could also be a candidate, the analyst said, although with its strong presence in the market already, it might only be interested in certain locations.

Stern suggested that either Schnuck Markets, St. Louis, or Giant Eagle, Pittsburgh, could be interested. Both are privately owned players that operate strong regional banners in areas adjacent to Marsh's territory. Giant Eagle declined to comment, and Schnuck could not be reached for comment.

Although Marsh, which is scheduled to celebrate its 75th anniversary next year, has a long history of market leadership and industry innovation, in recent years the rapid expansion of Bentonville, Ark.-based Wal-Mart Stores has made it difficult for Marsh to grow. Since 2000, Wal-Mart has added 11 supercenters, three Neighborhood Markets and five Sam's Clubs in the area.

Marsh has tried growth through acquisition and expansion into new markets, such as its foray into the suburbs of Chicago in August. It has in the past two years opened four Marsh "lifestyle" stores featuring a radically different layout based in part on a European market, and two Arthur's Fresh Markets focused on fresh and prepared foods. "Basically, they have invested all of their cash flow into development, and they have nothing to show for it," said the analyst who wished to remain anonymous.

Eric Hillenbrand, second vice president, retail sales and leasing, Colliers Turley Martin Tucker, Indianapolis, a local real-estate firm, said Marsh has many good locations and is well-liked by consumers, but has been unable to keep pace with its better-capitalized rivals.

"The grocery store market in Indianapolis is very competitive and it doesn't look like it's going to get any less competitive," he said. "Kroger has been very aggressive about opening up new stores in the past several years, and Marsh has tried to do the same, but they don't have quite the velocity that a Kroger or a Wal-Mart has."

In a message to employees, Don E. Marsh, chairman and chief executive officer, said the company "does not plan to slow down" during the process. "The marketplace has changed a lot over the years, and today it is fiercely competitive," he said.

The company said it has retained Merrill Lynch & Co. to seek strategic alternatives.

Marsh operates 70 traditional Marsh supermarkets, 38 price-impact LoBill Foods stores, eight O'Malia Food Markets, two Arthur's and one Savin$, mostly in central Indiana. It also has a 160-store convenience-store chain, Village Pantry, which some observers suggested might be easier to sell.

The company is publicly traded but substantially owned by the founding family. The shares include about 3.7 million in Class A stock, which has voting rights, and 4.2 million Class B, which does not.

Don Marsh owns about 21% of the Class A shares and 10.9% of the Class B shares, while David Marsh, his son and the president, owns 2.8% of the Class A shares and 1% of the Class B shares, according to the most recent proxy.

The stock price fell below $11 per share after the news, giving it a market capitalization of about $84 million.

In the second quarter ended Oct. 15, Marsh reported a loss of $3.4 million on sales of $549 million, vs. net income of $1.3 million on sales of $524 million in the year-ago period. Through two quarters the company posted a loss of $2.7 million on $959 million in sales.