On April 21st 2006, Marsh Supermarkets announced that is has signed a letter of intent with Sun Capital Partners, a private equity firm, to be acquired for $11.125 per share. This news comes approximately five months after Marsh announced that it had hired an investment bank to explore strategic options including the possible sale of the company. The offer values Marsh at a 21% discount to its stated book value of $14.10 per share and below its July trading price of approximately $14. It should be noted that Marsh’s book value includes land and buildings which are recorded at historical cost less depreciation. Marsh recently had the real estate appraised at between $100 million to $150 million in excess of book value. This implies an adjusted book value for Marsh of between $26.60 and $32.85 per share.

Given these range of values, we believe Sun Capital’s offer of $11.125 per share is inadequate. At this price, we calculate that Sun Capital is essentially paying for Marsh’s real estate, and getting the rest of the company’s assets for next to nothing. This would include the Marsh brand, which carries a lot of goodwill in the community and the Village Pantry convenience store chain. In the past week, shares of Marsh have traded above $11.125. This suggests that some investors may be expecting a higher offer. In the meantime, we have decided to hold our position in Marsh as we believe that its shares remain extremely undervalued on a net asset value (NAV) basis.

June 2, 2006

On Tuesday May 30th, Marsh Supermarkets received a letter from Drawbridge Special Opportunity Advisors and Cardinal Pardon offering to purchase the Company for $13.625 per share.  This offer represents a $2.50 increase, or a 22% premium over the previous offer of $11.125 made on May 3rd by Sun Capital Partners. Although we are pleased to see a better offer emerge, we are not surprised. With a book value of $14.10 per share and an additional $100 to $150 million, or $12.40 to $18.75 per share in unrealized real estate value, we feel Marsh remains an attractive investment for private equity investors. In effect, we believe that the sum of the parts of Marsh’s assets is worth more than the whole. In summary, given that the best offer for Marsh is still well below its net asset value, we are retaining our shareholding with the view that it is possible that a higher offer could emerge from Sun Capital or perhaps a third interested party.

September, 2006

On Friday September 22nd, 2006, shareholders of Marsh Supermarkets approved a proposed merger with MSH Supermarket Holdings, an affiliate of private equity group Sun Capital Partners. On September 28th the deal officially closed, and shareholders received $11.125 for each share of Marsh. For comparison, we purchased the shares in April of 2006 at around $9.60 per share for a five month holding period return of just under 16%.

At the time of our investment, Marsh was trading substantially below our estimate of its sum of the parts or break up value. Marsh owned the land and buildings on many of its stores, operated a profitable convenience store chain and owned the Marsh brand, a name that holds a lot of goodwill in the Indiana community. Given its relatively low stock price, we felt Marsh would make an attractive takeover target to either a strategic buyer or a private equity firm. In hindsight, while we were intellectually correct in identifying Marsh as a potential takeover target, we miscalculated the eventual takeover price. What was surprising to us wasn’t so much the price that Sun was offering to pay, but rather the low price which the owners of the company were willing to accept.

With ABC owning less than 5% of the Marsh shares, the decision to accept the proposed offer from Sun Capital ultimately rested with company insiders, (mainly consisting of the Marsh family with 18% ownership), and other institutional shareholders. While we were initially not in favour of their $11.125 takeover offer, democracy ruled as over 75% of shareholders voted to approve this transaction. In the end, it appeared as if many investors decided to support the Sun offer out of fear that if the deal fell through, the value of Marsh shares would plunge.

Interestingly, the lesson learned is that although a company may appear to be worth significantly more than its market valuation, investor psychology, poor market sentiment and fear of the unknown will ultimately price a business transaction.