Will Dollar General's IPO Succeed?

Taken private in the summer of 2007, Dollar General may make a return to the public markets soon. It's a standout winner among KKR's portfolio right now, so it's critical that this IPO is executed flawlessly.

This morning the WSJ reported that

Kohlberg Kravis Roberts & Co. is in advanced preparations for an initial public offering of stock in Dollar General Corp., said people familiar with the matter, as the private-equity firm aims to solidify its reputation ahead of its own trip to the public markets.

The column later speculates on the value of Dollar General:

Dollar General has become one of KKR's best-performing assets amid the down economy. For the quarter ended May 1, its profit surged to $83 million from $5.9 million a year earlier. While most retailers are retrenching, Dollar General is planning to raise its store count by 450 this year from 8,362 locations at the end of 2008. The Goodlettsville, Tenn., company's gross margins rose to 30.8% from 28.8%.

When KKR first bought Dollar General for $7 billion, it valued the equity at $2.8 billion, using debt to pay for the rest. Assuming the company can attract the same market values as Wal-Mart and other successful retailers, that equity stake could be worth about $3.7 billion today, meaning KKR would have increased its investment about a third.

The WSJ replied to an email I sent questioning the valuation method, and they explained they were using an 8 multiple on (EV/EBIDTA). You would arrive at a much smaller number using (it was the WSJ who mentioned Wal-Mart (WMT) as a comparable) Wal-Mart's comparable Price-to-Sales ratio, or Price-Earnings. That said, the operating results at Dollar General are stellar, so I'd say the longer KKR waits to dump it back to the public, the better they'll do...The recent S-1 has a look at full year results - they're growing fast so I wouldn't exclusively use trailing numbers to value the company.

A comparison of of Dollar General's April quarters pre and post LBO are below. Operating results are vastly improved -- and they sure better be, as the massive debt incurred in the LBO requires upwards of $80million per quarter in interest payments....

Comments

[Egg:]

Haven't people learned the lessen yet to NEVER buy an IPO for a company (DG) that was recently taken private?

This is basically nothing more than a huge insider sell.

Jul 29 11:08 PM

[BJ Feng:]

Sometimes the companies are bloated and PE can cut the fat, then sell it back to the public for a good gain. Other times, what they cut isn't fat, but necessary services that relate to the customer experience. I can remember how bad it got at Rite Aid when there was only one cashier thanks to cost cutting. Many people just left their merchandise and walked out rather than waiting 10 minutes to pay. And I still won't bank with BOA (BAC) after they instituted their cost cutting that destroyed customer service a decade ago. Have a problem? Go and call customer service even if you're at the bank! No one can help you directly, only way to deal with a problem is with a call to some clueless, underpaid phone rep.

I haven't been to Dollar General so I can't say if service has suffered. Buyer beware though, I am very skeptical of companies PE takes IPO. Need more time to fully evaluate if there were smoke and mirrors involved.

Jul 30 12:06 AM

[Brad Castro:]

I agree with Egg - it's ridiculous to even consider an IPO like this. For the most part, private equity doesn't improve the businesses they take private - they just saddle them with a ton of debt which is then used to pay the private equity firm's fees for the taking them private.

You know a business is truly valuable when it goes private and stays private - and isn't drowning with debt in the process. Whether it's flipping houses or flipping businesses, buyer beware.

Capitalism at its best creates value. This isn't an example of that. On the contrary, this is an example of the opposite - wealth for a few through the process of eliminating value.

Shameful . . .

Jul 30 10:52 AM

[Rhino Realty:]

Diasgree with negative spin on IPO...Dollar General has an excellent business model and the company should benefit from operating as a public company. I will grab up shares and suggest you watch this one closely :)

Aug 31 11:08 PM

[They who he...:]

I think in current market scenario, with familes using cost cutting as their basis, that this one may just work. I agree KKR is a shyster, but speculators are buying shs in Iraqi oil cos, why not inexpensive retail merchants down the block. My wife wants to buy a couple hundred....nuff said.

Nov 09 02:36 PM

[b3rkut:]

when you and egg say you are against buying a previously privatized company, are you referring to buy-and-holding an IPO, or buy-wait-a-few-days-an... if there is a lot of hype about a company, chances are in the very short term, the stock will rise, so why not cash in for a few days' investment?

thnx!


On Jul 30 10:52 AM Brad Castro wrote:

> I agree with Egg - it's ridiculous to even consider an IPO like this.
> For the most part, private equity doesn't improve the businesses
> they take private - they just saddle them with a ton of debt which
> is then used to pay the private equity firm's fees for the taking
> them private.
>
> You know a business is truly valuable when it goes private and stays
> private - and isn't drowning with debt in the process. Whether it's
> flipping houses or flipping businesses, buyer beware.
>
> Capitalism at its best creates value. This isn't an example of that.
> On the contrary, this is an example of the opposite - wealth for
> a few through the process of eliminating value.
>
> Shameful . . .

Nov 14 11:45 AM