By Michael Tsang
Nov. 13 (Bloomberg) -- Dollar General Corp., the discount retailer controlled by private-equity firm KKR & Co., raised $716 million in an initial public offering selling shares at the low end of the range it sought.
The company, KKR and other owners sold 34.1 million shares at $21 each, the Goodlettsville, Tennessee-based retailer said in a statement yesterday, after they asked for as much as $23. The IPO gives the merchant a capitalization of $7.2 billion and values it at 26.9 times reported earnings, a 77 percent premium to Wal-Mart Stores Inc., the world’s biggest retailer, Bloomberg data show. Dollar General will receive 67 percent of the proceeds, while selling stakeholders will get the rest.
Dollar General is the fifth U.S. company IPO in November and comes after an eight-month, 61 percent rally in the Standard & Poor’s 500 Index spurred the most American offerings in almost two years. While sellers reaped $9.6 billion unloading stock, Dollar General’s IPO price suggests institutional buyers are starting to extract bigger concessions from underwriters after three deals were pulled in the past two weeks and more than half of the IPOs since September fell below their offer price.
“It’s definitely going to be more of a buyers’ market as opposed to a sellers’ market now,” said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset in Cincinnati. “Deals are going to get a lot more scrutiny.”
Taken Private
Citigroup Inc., Goldman Sachs Group Inc. and KKR of New York, among Dollar General’s biggest shareholders, also served as lead underwriters for the IPO, along with Charlotte, North Carolina-based Bank of America Corp.’s investment banking unit Merrill Lynch & Co. and New York-based JPMorgan Chase & Co.
The retailer, which will use the proceeds to pay down debt, begins trading today on the New York Stock Exchange under the ticker DG. Dollar General’s IPO comes less than 2 1/2 years after it was acquired by KKR in July 2007 in a $7.3 billion purchase. The deal was KKR’s last leveraged buyout before the credit markets froze in August that year.
The IPO price values the company at 26.9 times reported net income of 78 cents a share in the 12 months ended in July, according to a regulatory filing on Nov. 9.
Walmart, which has a capitalization of $205 billion, trades at 15.2 times reported profits, Bloomberg data show. The Bentonville, Arkansas-based company said yesterday that third- quarter profit rose 3.2 percent and forecast sales this quarter would be little changed.
Relative Value
Dollar General’s price-earnings ratio falls to 18.5 times if its first-half profits of $177 million are averaged over a year and adjusted for the decline in interest expenses following the IPO, according to Francis Gaskins, president of IPODesktop.com in Marina del Rey, California.
That’s 25 percent higher than Walmart’s ratio of 14.8 times estimated 2009 profit, Bloomberg data show.
“The deal they’re bringing out is one that happens to be doing well in this environment,” said Eric Cinnamond, the Jacksonville Beach, Florida-based manager of the $249 million Intrepid Small Cap Fund that has gained 51 percent in the past year, beating 91 percent of competitors. “They’re winning the relative game in retail right now.”
Same-store sales at Dollar General rose 8.6 percent in its fiscal quarter ended July, according to data compiled by Bloomberg, amid the deepest U.S. recession since the 1930s. Sales at Walmart stores declined 1.5 percent in the same period.
Debt Burden
Dollar General, which had $4.1 billion in long-term borrowings at the end of July, used about 39 percent of its operating income for interest payments, Bloomberg data show. That’s more than 10 times the median amount that interest expenses trim from operating income at 10 competing retailers.
“The debt burden is definitely going to be an issue,” said Nick Einhorn, a Greenwich, Connecticut-based analyst at Renaissance Capital LLC, which has specialized in IPO research since 1991. “They have done a good job in the past couple years definitely, but there is a question of how much of that is real improvement. How much of that is a one-time boost because of the economy that may go away?”
The U.S. economy returned to growth last quarter after a yearlong contraction, expanding at a 3.5 percent pace, the Commerce Department said last month.
KKR, founded by Henry Kravis with his first cousin George Roberts and their Bear Stearns Cos. colleague Jerome Kohlberg in 1976, is listing Dollar General as investors suffer the worst returns on U.S. IPOs since at least 1995.
AEI, Aviv
AEI, the George Town, Cayman Islands-based former unit of Enron Corp., and Chicago-based Aviv REIT Inc., the real-estate investment trust that operates nursing homes in 21 U.S. states, postponed offerings in the past two weeks. Both companies were backed by private-equity firms.
Rue21 Inc., a teen apparel retailer, sold 6.77 million shares in an IPO yesterday at $19 each, raising about $129 million. The price exceeded the $16 to $18 a share that the Warrendale, Pennsylvania-based company originally sought.
The IPOs of 18 U.S. companies that went public in September and October have outperformed the S&P 500 by 0.1 percentage point on average in the first month of trading, the worst performance in Bloomberg data going back 14 years. Offerings by American companies have beaten the S&P 500 by an average 21.3 percentage points since 1995, the data show.
‘It’s Probably Overpriced’
“IPO means, ‘It’s probably overpriced,’” said billionaire investor Kenneth Fisher, who oversees $35 billion as chairman of Woodside, California-based Fisher Investments Inc. “IPOs have never been done for the benefit of the purchaser. IPOs are done for the benefit of the company by definition. So the history of IPOs is very clear that they’re money losing activities.”
Fisher said he’s not interested in Dollar General’s IPO.
KKR and its co-investors, Goldman Sachs and Citigroup, Boston-based Wellington Management Co. and the Canada Pension Plan Investment Board, spent $2.8 billion to take over Dollar General, and borrowed the rest. Including $384 million in net debt that Dollar General had at the time, the deal was valued at $7.32 billion.
The stakeholders reaped $239 million from selling 11.4 million shares. That would increase to $347 million if the underwriters exercise an option to purchase an additional 5.12 million shares for their clients.
In September, Dollar General paid a dividend of $239 million to its owners, which matches the amount they received in the IPO and exceeds the company’s operating income in its fiscal second quarter. The retailer doesn’t plan to pay any dividends as a public company, according to the Nov. 9 filing. Citigroup, Goldman Sachs and KKR will also collect fees as underwriters.
‘In the Bank’
The dividend may have been paid to offset any loss of income had the underwriters failed to drum up enough buyers for the IPO, according to Renaissance Capital’s Einhorn.
“If you don’t get the IPO done at the price you want, at least that money is sitting in the bank already,” he said.
Using KKR’s own valuation models, the “fair value” of Dollar General’s common stock was $12.95 each at the end of May, according to the regulatory filing. Dollar General used two methods to determine the value of its stock: one that estimates the present value of future cash flows and another based on comparable publicly traded companies, the filing showed.
That valuation was used to set the exercise price for 731,821 stock options that Dollar General granted on May 28.
Fair Value
The IPO price range of $21 to $23 that KKR sought from institutional buyers “was not derived using a formal determination of fair value.” Dollar General said higher sales growth versus its rivals in the first six months of 2009, a 17 percent increase in the S&P 500 from May 28 through Oct. 27, and the “dramatic improvement” in the market for IPOs since September helped to account for the valuation gap.
The IPO implies a so-called enterprise value, or the sum of Dollar General’s stock and debt minus its cash, of about $11 billion, Bloomberg data show. That’s about 50 percent more than the total deal value of KKR’s takeover in 2007.
To contact the reporter on this story: Michael Tsang in New York at mtsang1@bloomberg.net.
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