By Tim Kiladze
The Canada Pension Plan Investment Board is using its multi-billion dollar balance sheet to buy into one of the cheapest stores around.
Acting jointly with private equity fund Ares Management, CPPIB has put together a joint bid to buy a majority stake of 99 Cents Only (NYSE:NDN) dollar stores for $1.6-billion (U.S.) The asset has been in play since March when the company first received an unsolicited takeover offer, prompting a number of private equity players to enter the bidding war.
Their reasoning is a no brainer.
With the U.S. economy facing dismal growth prospects, U.S. consumers -- who account for 70 per cent of the country’s economic growth -- have had to move down market. Goodbye Bloomingdale's, hello Macy’s (NYSE:M). Goodbye Macy’s, hello dollar stores.
Everyone understands that theory, but the numbers behind it will shock you. In 99 Cents’ case, in the four years from 2006 to 2009, the company churned out a combined profit of $33-million. In the last 12 months, it made $75-million. And management expects to make more because even the U.S. Federal Reserve has predicted that growth will be extremely weak until at least 2013.
This dollar store strength is reflected in the various stock prices of comparable companies. (99 Cents’ stock isn’t a good indicator because it has been elevated since receiving the takeover offer in March.)
Year-to-date, the stock of Dollar General Corp. (NYSE:DG), a $13-billion dollar store chain south of the border, is up 27 per cent. Rival Dollar Tree Inc. (NASDAQ:DLTR), a $10-billion chain, has seen its shares skyrocket 43 per cent. For comparison, the S&P 500 (NYSEARCA:SPY) is down 5 per cent over the same period.
The same is true for Dollarama (DLMAF.PK), which trades on the Toronto Stock Exchange. That stock is up 31 per cent this year, and up 93 per cent since going public in October 2009. The company has been a huge success story for private equity firm Bain, which has unloaded its stake in the company over the past two years.
Because dollar stores have been so hot, 99 Cents isn’t the only one that has been pursued by private equity players. Earlier this year Family Dollar Stores Inc. (NYSE:FDO) rejected a $7-billion takeover bid from Trian, an investment firm led by investor Nelson Peltz.
This also isn't CPPIB's first play in the dollar store space. The investment board was part of a team put together by KKR to buy Dollar General in 2007. Dollar General then went public two years later in 2009, but CPPIB kept 17.5 million shares. Something the fund managers should be quite happy about today.
For the 99 Cents deal, RBC Dominion Securities and BMO Nesbitt Burns offered financing and advice to Ares and CPPIB, while Torys served as CPPIB's legal adviser.