Market Basket: The Finish Line is in Sight

Events in the Market Basket saga are happening at an accelerating pace, a sure sign that things are coming to a head and will resolve soon. Here’s what’s happened since Friday:

1.    Market Basket's two new CEOs announce that hours are effectively being cut to zero for part time employees. This was carefully phrased to avoid the term ‘layoffs’, but those part timers are out of work and can apparently collect unemployment.

2.    Governor Deval Patrick belatedly breaks his silence and issues a statement on the Market Basket associates’ rebellion and customer boycott. He directly addresses the Board of Directors of Market Basket, and tells them that the situation has "gotten out of hand”.

3.    The Board of Directors of Market Basket issues a statement at 5:30 on Friday evening requesting the prior management team return to work to stabilize the situation. Arthur T. is offered an unspecified role that is not CEO.

4.    A statement is issued on behalf of the associates that this offer from the Board is not acceptable. The only demand all along has been Arthur T.’s return as CEO, and that wasn’t offered. The rebellion and boycott continue.

5.    On Saturday the A Shareholders (the shareholders from Arthur S.’s side of the family) issue a statement explaining their position, presenting themselves as reasonable people who would accept Arthur T.’s offer, but financing problems exists. They blame Arthur T. for the lack of a resolution.

6.    Arthur T., through a spokesperson, rejects the A Shareholders' offer to return to work in the unspecified role.

7.    The A Shareholders issue another, more angry statement, accusing Arthur T. of holding customers and associates hostage because he will not accept their offer.

What to make of all this? Here’s one person’s opinion (mine), which was developed by looking at how events have unfolded and the motivations of each group involved in the bargaining.

Consider this analogy—buying a house. Buying a business  has some similarities, so this will clarify a lot of what is going on. First you find the house you want to buy, and then you need to secure financing. To qualify for financing, you need to prove an income stream (usually wages) sufficient to pay the mortgage, you need to come up with a down payment, typically between 5% and 20%, and you need an appraisal of the house which says it is worth what you are willing to pay. This last step is because the house itself is the collateral for the loan from the bank—it insures the loan. If you don’t pay the loan, the bank takes the house. Therefore the bank needs to ensure that the house is worth what they are lending you, so they can get their money back in the event of a foreclosure.

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In the case of Arthur T. Demoulas making an offer to purchase Market Basket, he certainly has the down payment, since he and his side of the family own nearly 50% of the company, but for traditional financing he is currently lacking both the income stream and the collateral.

Typically when purchasing a company, it is the company itself that provides the cash flow and the collateral. However, in the case of Market Basket, where so much is out of the ordinary, it’s the actions that allowed this offer to be seriously considered that are complicating the process. The firing of Arthur T. and the subsequent hiring of two new CEOs has been completely disastrous for the value of the company, and the company-wide rebellion and customer boycott have been so successful that there now is a negative income stream from the Market Basket stores, while the value of the entire chain has plummeted.

To go back to the house analogy, it’s as if you offered $300,000 for a nice home, but when the bank appraiser shows up, a hurricane has hit—the roof’s blown off, the windows are broken, the septic system is flooded, and the chimney is lying in the backyard. The appraiser looks at the house and says it’s not worth even close to $300,000—it’s a fixer upper, worth maybe $100,000. That’s where Market Basket is now—a hurricane has hit, and it’s a mess.

But it’s a very fixable and straightforward mess, because the only possible way to repair the Market Basket chain is to bring Arthur T. back as the CEO. He knows that, the associates know that, the customers know it, the A and B shareholders know it, and every other potential buyer, such as Delhaize America (Hannaford's parent company), knows it.

Contrary to other reports I've read, I believe that at this point the family feud is no longer a major factor. I think that we can assume all parties are now acting logically to get what they want. In the case of the A Shareholders, I can think of a few billion reasons why their attention is totally focused on getting a deal done, even if it means selling to Arthur T. and the B Shareholders. Sure the A Shareholders might have to eat some crow, but I sure would, for a few billion dollars. They were trying to sell the place anyway.

Put yourself in their position. For your entire life you’ve had this huge monetary backstop of dividends and wealth, but it’s evaporating before your eyes. None of the Demoulas family will end up using EBT cards from this debacle, but if nothing changes it’s conceivable their wealth could be reduced by a factor greater than 50%. The feud might have had a hand in what started the meltdown, but unless these people are crazy, which I truly don’t think they are, they want this settled fast.

Look at the last major statement from the from the A Shareholders--this really tells us a lot, particularly because all parties involved have retained the services of public relations firms, so every word in these statements is exactly what the interested party wanted it to say.

Statement from the A Shareholders:
“In response to the current situation involving Demoulas Super Markets, Inc. (Market Basket), the Class A Shareholders, who have remained silent to try to resolve this dispute privately, feel compelled to correct the public record. We care deeply about Market Basket, its employees, customers, suppliers and other stakeholders and have been working around the clock with our advisors to find a workable solution. We are, and have been, prepared to sell our majority ownership interest in Market Basket to the Class B Shareholders led by Arthur T. Demoulas for the price proposed by Arthur T. Demoulas. We offered deal terms that our nationally recognized financial advisors informed us are customary for this type of deal. The Class A Shareholders, including trustees with fiduciary duties, have offered to provide financing for Arthur T. Demoulas’ purchase if he does not have enough cash to close. The terms included an interest bearing loan secured by collateral that has an acceptable payment schedule. We have been advised that it would be irresponsible to make a loan without collateral, interest or a payment schedule, similar to terms that would apply to any traditional bank loan. Our proposal would permit Arthur T. Demoulas to return to work immediately to work collaboratively to stabilize the business on terms proposed by the independent directors of the Market Basket Board if the Class B Shareholders would commit to buy our interests. Our proposal, made last week and reiterated throughout this week, has not been accepted. Arthur T. Demoulas’ conduct to date, including his most recent public statement, continues to undermine Market Basket and the Class B Shareholders have not indicated a willingness to engage in good faith discussions for a sale. The Class B Shareholders have given us no choice at this time but to consider all available options to sell our equity in order to protect the interests of all Market Basket stakeholders.
We have given Arthur T. Demoulas and the other Class B Shareholders many opportunities to end the current controversy. We continue to be prepared to sell our interests in Market Basket for the price originally proposed by Arthur T. Demoulas.”

The A Shareholders' hand

In this statement above, the A Shareholders are responding to Governor Patrick’s statement, which indirectly put the onus on them for not resolving the conflict in a timely manner, plus they are attempting to shift blame, for not striking a deal, from themselves to the B Shareholders, including Arthur T. Right now the court of public opinion holds Arthur S. and the A Shareholders responsible.

One goal of this statement is to position themselves for any upcoming negotiations, which Governor Patrick has volunteered to help with, and the other goal is to try to get the B Shareholders, and Arthur T., to accept their offer to return to work and stabilize the company. You’ll notice that no mention is made about what specific role Arthur T. would play, making the CEO role conspicuous by its absence. They also say they want him to work ‘collaboratively’ to stabilize the company, which begs the question of ‘with whom would he work collaboratively?' Since the obvious answer appears to be with the new co-CEOs, Arthur T.’s rejection of this offer is no surprise.

Back to the house analogy, what they are saying regarding collateral is that their "nationally recognized financial advisors" have recommended “an interest bearing loan secured by collateral”……in other words, maybe the remaining 50% of the company is not sufficient collateral, due to the fact the chain is nearly valueless as it stands now. That would be the basis for their request that Arthur T. and his management team return to work collaboratively with the new co-CEOs to stabilize the company—it would then be worth more, increasing the collateral, but it then also could be sold more easily to another entity.

However, my educated guess is that the bigger issue is the interest rate to be charged on the loan, which is not disclosed, despite being extremely relevant—again, think of buying a house. What you can pay for a home depends on two major factors—the price, and the interest rate on your mortgage. If your mortgage is at 2% your payments might be $1000 a month, while at 15% they might be $3500 a month, even though you are buying the same house. Arthur T. is buying the same company, but the cost per month depends upon the interest rate of the loan to purchase the remaining 50.5% shares. This affects a lot more than just money, and remember, the A Shareholders are financing this loan.....if the loan rate is too high, it will take too much money out of the business, which will severely hinder keeping prices low and benefits and wages high. A high interest rate is an avenue for more revenue to flow to the A Shareholders, yet from Arthur T's vantage point keeping this interest rate low is critical for Market Basket to continue to be run in the way it has been.

The classic line in this statement is the last—it’s very misleading. “We continue to be prepared to sell our interests in Market Basket for the price originally proposed by Arthur T. Demoulas”……this implies that the A Shareholders are prepared to sell to Arthur T. Demoulas, but that isn’t what it says… says at the price proposed by Arthur T. Demoulas…….in reality they are only saying that Arthur T. offered a price they’d accept, but they aren’t necessarily saying they’d sell it to Arthur T. at that price, nor at what interest rate, which is pretty obvious since they already have the offer. There is no commitment and no guarantee, which is no doubt a big part of the holdup. The fact that they could then, upon the company being stabilized, sell it to anyone they want, is addressed in Arthur T.’s response.

Arthur T.’s response:
This was terse, through his spokesperson, who accused the A Shareholders of wanting Arthur .T to “stabilize the company, while they consider selling it to another bidder.”

What I think this means:
The much ballyhooed family feud is not helping matters, but I think it is far from the deciding factor. This is a business transaction, and each side is trying to get the best deal they can. No one wants to go down with the ship—try to imagine the shareholders saying “women and children first to the unemployment lifeboats. We’ll stay here and go broke.”

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The only possible resolution to this is to bring Arthur T. back as CEO, and he’s not coming back unless he has absolutely firm guarantees they will not then sell the company to someone else. The only way to get this guarantee is to agree on the terms of the sale…..there is really no other way. Price is just one factor. The holdups appear to be collateral, and interest rates on the purchasing loan, and both are negotiable. “Where there is a will, there’s a way”. I’m sure the A shareholders have been advised by top notch financial advisors, but they really are in no bargaining position at all. They fumbled the ball on this one, making Bill Buckner look like Brock Holt, and have to take what they can get, because the alternative is nothing. Therefore, quit the posturing, give up on keeping the new CEOs, and figure out how to finance the deal at a reasonable interest rate. The Belgian group that owns Hannaford, the Delhaize Group, isn’t about to buy Market Basket in the condition it’s in now for what Arthur T. offered (he apparently offered a pre-crisis price), and Arthur T. isn’t going to go to work for the Delhaize Group without majority ownership or one extremely strong guarantee, which is highly unlikely to be offered. I’d imagine Arthur T. has had his fill of a minority ownership stake.

Of course the same can be said of the B shareholders and Arthur T.—the alternative to making a deal is nothing for them too. They are in an excellent bargaining position, but unless you consummate the bargain, it’s worthless.

The Hostage Statement:

The A Shareholder group also followed up on Arthur T.’s refusal to come back in a non executive role with a ‘Pot calling the Kettle Black’ statement, by saying, “Business negotiations should not prevent our Associates from earning a living or our customers from buying groceries. It is wrong to hold everyone hostage to gain a negotiation advantage.”

The B Shareholders' hand

Really?—that’s the most ridiculous thing I’ve heard in quite some time. Why would Arthur T. possibly come back to work, to collaborate with the CEOs that replaced him, to lose his negotiating position, and to help the Board that fired him possibly sell to another buyer? He’s a smart and an obviously crafty businessman, and he’s sitting there with a straight flush. The A Shareholders are bluffing, but they’ve shown their hand—they’ve got a nine high nothing. Bluffing only works when your opponent doesn’t know your hand. And what's with the 'hostage' references? It doesn't even make any sense.

The A Shareholders also said, “Clearly, each side has sets of proposals to solve the impasse — there are enough proposed solutions out there to begin a serious negotiation. Let’s end the hostage-taking and get together to work at finding common ground. We are ready [to] meet, anytime, anywhere.”

No kidding. I’d hope so. Figure out an interest rate that’s not usurious, and that is acceptable to both sides, agree on the price, and use the company as collateral. It’ll be worth plenty again with Arthur T. back in charge, and everyone knows that. It’s not all that complicated.

Update: Arthur T released a statement Sunday, essentially confirming what is written above. The price is fine but the terms (i.e.interest rates) are possibly onerous. Remember that the financing is being done by the A Shareholders, and the higher the interest rate, the greater the future, long term revenue stream to the A Shareholders. Too high an interest rate will not allow Arthur T. to run the company as he's run it in the past, as this interest rate represents a major cost to the business, which would force up prices and put downward pressure on wages and benefits.

Just a handy FYI, since I'm an IT consultant--The Boston Globe is providing a lot of press coverage of the Market Basket situation, so you might want to support them and pay for the online service so you can read the links. However, if you would prefer to continue to read them for free after the 10 free articles, just use 'private browsing' on Firefox or 'incognito mode' with Chrome.

About the author: Jay Shenk, currently an IT and Operations consultant, previously worked for a private equity funded company (which bought the company he worked for), where he ran distribution, IT, and other operational departments. He can be reached at  This email address is being protected from spambots. You need JavaScript enabled to view it. . for feedback or consulting work. He has also published a humorous novel (under a pseudonym) about his personal experiences with private equity buyouts, Keeping Up, which is available online from Amazon. This article is published by Crow Hill Associates, LLC.