Wednesday, July 29, 2009

Dollar General, then and now

AlphaNinja - 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 Walmart'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...

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

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