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    Second Acquisition Bid Proves Problematic for Marsh

    Richer offer causing angst for grocery/convenience store operator.

    INDIANAPOLIS -- In recent months, struggling Indianapolis grocer Marsh Supermarkets wooed more than two dozen suitors into a private auction, hoping to find the right buyer that would help it stay afloat.

    But this week, less than a month after selecting private equity firm Sun Capital Partners as the winner, Marsh found itself in the middle of a battle between Sun and one of the unsuccessful bidders that won't give up.

    As reported on CSNews Online, Marsh made public Tuesday that Drawbridge Special Opportunities Advisors and Cardinal Paragon Inc. have made a combined offer to buy the company for $107.8 million, or $13.625 per share. That offer is nearly 23 percent higher than the $88 million existing bid by Sun Capital.

    The Indianapolis Star reports that that disclosure pushed shares of Marsh to their highest levels in nine months. The stock closed at $13 Tuesday, up 21 percent.

    Marsh declined to say why it hasn't accepted the higher offer. But the development seems to put Marsh's future into question, just weeks after it appeared to have settled on a buyer.

    Marsh shareholders have yet to vote on the Sun Capital offer, but according to a signed agreement, Marsh would have to pay up to $15 million in breakup fees if it rejects the Sun offer.

    "What this does is gives Marsh the question: Do they pay $15 million to reap $19.8 million?" Matthew Will, associate dean for the University of Indianapolis' School of Business, said in the Star report.

    Some industry observers say they don't expect Tuesday's announcement to trigger a bidding match.

    The two sets of bidders have one thing in common. They both buy struggling companies. But Sun Capital has a record of trying to resuscitate them by cutting costs, taking them private and sometimes implementing radical restructuring measures.

    The two other players, Cardinal and Drawbridge, have a different background. Drawbridge, a hedge fund, invests in struggling companies but doesn't actively manage the companies it invests in. Its partner, Cardinal Paragon, owns commercial real estate and manages tenants such as A&P, Winn-Dixie, Shaw's Supermarkets, Costco and Wal-Mart.

    The firm's method is to buy real estate from struggling companies and lease it back to them, thus converting assets into cash. Since 1988, it has bought more than $4 billion in corporate real estate to help companies improve their balance sheets.

    But Cardinal has little if any experience running companies or actively turning them around. That left some experts wondering why Cardinal would want to buy Marsh.

    "I find this surprising," Gail Whitfield, owner and president of Whitfield Co., a Texas real estate company familiar with the group told the newspaper. "They are mainly a real estate company."

    Officials at Drawbridge, Cardinal and Sun Capital didn't return calls.

    But they have said a lot in their correspondence to Marsh officials in the past two months.

    Documents filed Tuesday with the Securities and Exchange Commission show that Drawbridge and Cardinal began pursuing Marsh in December. Burdened by high debt, weak sales and increasing competition from Wal-Mart, Target and specialty stores such as Wild Oats, Marsh put itself up for sale in November.

    Marsh, which owns Marsh Supermarkets, LoBill, O'Malia's and Village Pantry convenience stores, had interest from more than 30 bidders, a fact that wasn't revealed publicly until Tuesday.

    Marsh agreed three weeks ago to be bought by Sun Capital and signed a definitive deal in which it agreed not to entertain other proposals.

    The unsuccessful bidders signed agreements with Marsh that they wouldn't pursue a deal with Marsh for two years.

    Then, according to the latest disclosures, on May 8, Drawbridge and Cardinal sent a letter to Marsh, pleading for a second chance.

    They sent another letter on May 22.

    "We continue to be surprised and disappointed by your response," said one of the letters filed with the U.S. Securities and Exchange Commission. "Under Indiana law, the board of directors is required by its fiduciary duties to consider in good faith any superior offer."

    The firms said Marsh would have to make all the correspondence public to let shareholders know that there was a higher bid. Marsh officials requested Sun Capital's consent to open a dialogue with Drawbridge and Cardinal.

    Sun declined, saying it played by the rules and it would be unfair to reopen the bidding process for what they called an "illusory offer" from "an inappropriate interloper who has no proven record in acquiring and operating companies such as Marsh."

    Sun said in letters Friday and Monday that it wanted to complete the deal.

    The firm also pointed out that Marsh's financial position continues to deteriorate. It said that the Cardinal group's proposal doesn't take into account Marsh's "additional liabilities" and that Marsh's real estate values are grossly overstated.

    So the question remains: Will Marsh stick with a guaranteed $88 million from Sun Capital, or will it pursue a suitor offering $20 million more? Experts had no clear read on the outcome.

    "They are stuck between a rock and a hard place," said Will, the University of Indianapolis professor.

    "It's a comedy of errors," he told the Star. "I feel bad for Marsh. They didn't ask for this."

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