Value Library

The following is an excerpt from the ABC Perspective - April 2006 - Pg. 3

ATLAS COLD STORAGE

Atlas Cold Storage is one of the most controversial names in the income trust sector. After an anonymous letter was sent to the Ontario Securities Commission questioning the accuracy of Atlas’s 2002 financial statements, a comprehensive review by the Trust’s Audit Committee was conducted. The investigation revealed that certain members of the Trust’s senior management team improperly assigned certain expenses to capital expenditures in an attempt to inflate net income. After the smoke cleared, distributions were suspended, management was ousted, and bankruptcy looked like a foregone conclusion. A class action lawsuit claiming damages of $353 million and punitive damages of $50 million was launched in February 2004.

Since these turbulent times, Atlas’s new management team has instituted several initiatives to restore its business and balance sheet. One of the most significant developments has been the refinancing of all outstanding debt. The new 6.085% ten-year package, financed in U.S. dollars, substantially reduces interest expense, foreign exchange exposure, and total debt. When David Williamson assumed the CEO title in April 2004, the Trust was paying a hefty 8 - 9% on roughly $210 million in long-term debt. Now, with only $100 million in long-term debt, the Trust’s debt/equity stands at a conservative 30% (below the average for its peer group and for real estate investment trusts).

Top line growth will be management’s primary focus for this year. One growth area that management has identified is transportation management. Currently, only six facilities offer transportation management services. As new facilities are added, the incremental cash flow is quite material as it requires virtually zero capital investment. Additionally, with its new financial flexibility, management can make accretive acquisitions if the large, family controlled regional operators wish to exit the industry.

As the bottom line starts to improve, we believe that current unit prices do not fully reflect Atlas’s underlying net asset value (NAV). Recent cold storage transactions demonstrate the significant disconnect between the market value and book value of the Trust’s assets. Recent expansions to existing cold storage facilities and new facility construction in the industry have been valued between $100 and $125 per square foot. However, Atlas’s most recent balance sheet reveals that the implied value of its buildings and real estate is currently between $45 - $55 per square foot. Based on a conservative valuation, we believe Atlas’s cold storage facilities alone to be worth, at minimum, $7 per unit. In addition to these physical assets, Atlas’s logistics and transportation division could be worth $1.50 per unit. With an estimated NAV of $8.50 per unit, and a yield of 5%, we believe the units represent good value at current levels.

MARSH SUPERMARKETS

Marsh Supermarkets operates 117 supermarkets, 161 Village Pantry convenience stores and seven upscale floral shops in central Indiana and western Ohio. In addition, the company also operates a food services business which provides catering, vending and office coffee services. Its supermarkets feature an extended line of traditional grocery store items as well as service and specialty departments, such as delicatessens, bakeries, prepared foods, prime cut meats, fresh seafood, floral and video rentals.

Marsh, which is currently celebrating its 75th year in business, announced in November 2005 that it has hired an investment bank to explore strategic options for the company including the possible outright sale of the business. Although the company has enjoyed a long and successful tenure in Indiana, the markets there have become brutally competitive in recent years. Wal-Mart and Costco continue to add stores, while higher-end specialty shops such as Wild Oats and traditional national chains like Kroger are making their push as well. In fact, Marsh’s market share has fallen from 25% to 17% in just the last four years. Sales have remained relatively flat and profit margins have been squeezed. Marsh’s stock, which for many years traded between $10 and $15, is now selling for just $8.60.

However, with a current market capitalization of just $68 million, we feel Marsh could be worth substantially more to a strategic buyer. As of its last quarter, Marsh had tangible shareholder’s equity of $124 million, or $14.10 a share. For a larger supermarket chain looking to enter the Indiana market, buying Marsh at its book value would probably be cheaper than building the supermarkets from scratch and having to hire and train the staff. A buyer would also be getting the Marsh brand name, which carries a great amount of goodwill in the community.

Marsh could also attract the interest of private equity investors. Of particular interest to them would likely be Marsh’s steady cash flow and significant real estate holdings. Marsh currently owns the land and building on 34 supermarkets and 44 convenience stores. It also owns two handling facilities with approximately 300,000 square feet of space. Marsh recently had its real estate appraised at between $100 and $150 million in excess of its book value. A buyer could theoretically purchase Marsh and finance the purchase by entering into a sale and leaseback agreement. A final option could be for Marsh to sell or spin out its Village Pantry convenience store chain. Looking at comparable publicly traded stocks, Village Pantry could be worth as much as $100 million which is more than the market capitalization of the entire company.

Irwin A. Michael, CFA