M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Thursday, August 28, 2014

Market Basket saga ends ... only to start again

The months long battle for control over Market Basket ended this morning with Arthur T. Demoulas, the ousted CEO who had the support of employees, buying the 50.5% of the company that his side of the family did not already own from Arthur S. Demoulas and his side of the family.  So, all is well in Tewksbury? Certainly everyone is happy today.  Arthur T. is back in place and mangement and employees are all on the same page trying to get the company moving again.  Soon enough food will be back on the shelves and everything will get back to normal.  Maybe. 

Why just maybe?  Remember this is a privately held family company. Many of the corporate changes pushed by Arthur S. and his side of the family involved cutting costs and moving the company into a position to put itself up for sale to another large competitor in the grocery space or to a private equity buyer.  Those changes enraged workers who liked the fact that the family business treated them like ... family.  The changes sought by Arthur S. challenged the corporate culture and understandly generated a backlash.

So, why isn't the return of Arthur T. just great news for Market Basket and its employees?  Well, the cost of the acquisition may come back to haunt everyone at Market Basket.  To do the deal, Arthur T. had to mortgage all the company's New England real estate and accept a $500 million investment from a private equity firm (Blackstone).  All that equity with its "soft edge" that allowed Arthur T. to manage the firm over the past few years as a family business, paying above market wages and demonstrating loyalty to employees in hard times has all been replaced by "hard edged" debt and a private equity investor who will demand a return and probably look at labor costs with more of a gimlet eye.  

And the retail grocery business typically operates on tight margins anyway. You wonder why grocery stores have moved into prepared foods?  Sure, we're all busy, but prepared foods generate huge margin.  Not a lot of that going on at Market Basket.

So celebrate today. But, I expect things will be difficult up in Tewskbury for some time to come. 

-bjmq

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