INDIANAPOLIS - There may not be a next generation for Marsh Supermarkets.
Still struggling to find a buyer and needing to cut costs, Marsh here last week said it would close several stores and had terminated 25 headquarters employees - including four officers who were third-generation members of the founding Marsh family.
The executives let go were three sons and a son-in-law of Don Marsh, the company's chairman and chief executive officer - David Marsh, Arthur Marsh and Don Marsh Jr., and Joe Heerens. David Marsh had served as president and chief operating officer, Arthur Marsh was executive vice president of mergers and acquisitions, Don Marsh Jr. was vice president of specialty procurement and Heerens was senior vice president of political affairs. The board of directors also named William Marsh, brother of Don, as interim chief operating officer and president. David Marsh most recently served as executive vice president of property management. David's wife, Jodi Marsh, had recently left the company to accept a position as vice president at management consulting firm Sease, Gerig & Associates, Indianapolis.
Don and William Marsh are sons of Ermal Marsh, who founded the company 75 years ago.
In addition, Marsh said it would close a Savins store in Muncie, Ind.; a Marsh Supermarket in Fort Wayne, Ind.; six Village Pantry convenience stores; and the Trios Di Tuscanos restaurant in Noblesville, Ind., by the end of the month.
The actions were expected to save the company $12 million annually.
"This is a time when the company's management needs to focus their efforts on restructuring the company's operations, reducing costs and improving profitability. We recognize these efforts will require sacrifices at many levels, and it is important that the company's management leads the way," the Marsh board of directors said in a statement, adding that further reviews of the store base and expense structure are forthcoming.
The moves come as Marsh continued to search for a buyer amid dwindling resources and company performance. But while fleeing investors have left Marsh a cheap buy, and recent cost-cutting moves might indicate a prelude to a deal, analysts last week remained pessimistic.
It's been a tumultuous few months for Marsh. Since Marsh announced it had engaged an investment bank to seek strategic alternatives in late November, class A stock in the company has fallen from around $11 a share to $6.25 last week. Interest in Marsh bonds has also fallen: They were trading around 88% of par last week after being as high as 102.38 in November, reflecting skittishness over $115 million in notes due in 2007.
Amid the market worries, or perhaps a part of them, was news that Marsh's chief financial officer had left the company after what Marsh termed a disagreement with senior management; a reduction to "junk bond" status by the Moody's rating agency; and an article in a local business publication last week raising questions about ties between Marsh's management and some of its independent directors.
Together, these events have raised more doubts that a suitor might be found for Marsh, already struggling behind a heavy debt load, a store base in need of repair, and sharp competition in slow-growing markets.
"Where Marsh may look cheap from a market capitalization standpoint, they have $200 million in debt and a lot of their stores need to be remodeled," Steven Baumgarten, a Pittsburgh-based retail analyst with Janney Montgomery Scott, Philadelphia, told SN. "It's going to be a difficult sale, especially to a retail supermarket company."
While a Marsh spokeswoman last week said only that the strategic review was ongoing, observers who spoke to SN last week expressed doubt that Marsh's supermarkets would attract significant interest. Spencer Sutcliffe, an analyst for 40/86 Advisors, Carmel, Ind., said he believes the company will likely be split up, with its Village Pantry convenience store division attracting strategic interest and the supermarkets going to a private equity investor intent on a turnaround or to realize real estate value.
Any deal, Sutcliffe said, would require a buyer to "structure the transaction in some way that there was not such a significant amount of debt."
"I think the best bet they have is to sell the convenience stores," he added. "If anything gets done, I think it will involve that. I don't see them operating their way out of this situation, so if they get a reasonable offer, I think they'll take it."
Published reports late last year suggested Alimentation Couche-Tard, the Canada-based operator of Circle K stores, was eyeing the Village Pantry chain.
Observers said Marsh's supermarket division suffers from an old store base weakening under increasing competitive pressure.
Marsh traditionally has turned to innovation to compete. But the introduction of innovative new store concepts - the "lifestyle" store in several locations, and the Arthur's Fresh Market specialty store elsewhere - has not proved strong enough to lift the entire chain, observers said. Marsh also operates the upscale O'Malia's chain and the discount banners Savins and Lo-Bill Foods, as well as catering and florist businesses.
"Marsh has some nice concepts, but you have to take the good with the bad," Mitchell Corwin, an analyst with Morningstar, Chicago, told SN. "More than half their stores are more than 10 years old. They spent their money on new stores rather than making renovations that might have yielded a better result, doing more subtle things to drive traffic through the whole chain. At the end of the day, you have nice lifestyle stores, but not enough of them."
According to David J. Livingston of DJL Research in Pewaukee, Wis., Marsh has made questionable real estate decisions, including building a new store in Naperville, Ill., earlier this year - a territory where Marsh had no other stores - and opening an upscale Arthur's store in a rural location. "It seems like they've been throwing some Hail Mary passes," he told SN.
Declining profit margins have challenged Marsh to meet interest obligations on a $75 million revolving credit facility. Last month, Marsh reached an agreement for a $25 million loan from Back Bay Capital, a Boston-based provider of secured loans to companies seeking more than the senior loan market makes available. The loan is secured by various owned properties, and would be used to reduce borrowings on the revolving facility.
Sliding sales and profits amid increasing competition prompted Moody's to lower its corporate rating on Marsh in December. Following this, the company's largest non-family equity holder, American Financial Group, Cincinnati, sold more than 250,000 shares.
"I have a fair value on the shares as zero - the company is not worth more than its debt," Corwin said.
Marsh said it expects to incur a fourth-quarter charge of $5.8 million to $6.8 million related to the staff reductions, as well as charges of $6 million to $10 million to cover store closures. The company said it would also record a non-cash impairment charge of $12.8 million related in part to lease adjustments.
The restructuring announcement made clear the company's board of directors was behind the moves and came shortly after an article in the Indianapolis Business Journal last week highlighted family ties and business dealings between certain independent board members and Marsh executives it termed "dubious at best." For example, board member Stephen M. Huse, chairman of the retailer's compensation committee, has a daughter married to Arthur Marsh.
