Friday, August 21, 2009

Dollar General files for an "IPO"

AlphaNinja - Back in July I wrote a little about speculation that Dollar General would make a return to the public markets. It was a 2007 LBO by Kohlberg Kravis Roberts, and is now viewed as a rare win among LBO's from that "vintage" 2006-2007 timeframe, in which companies were taken private at very expensive prices because of very cheap debt.

I believe now as I did then that operating results at Dollar General have improved amazingly, which is the point of an LBO. Now we get to the "exit" strategy for KKR. All IPO's are an "exit strategy" of some form or another, for venture capital backers, original employees, etc. Nothing wrong with that. But be especially careful in a case like this.

Reading yesterday's S-1, the first bit of comedy is the company referring to the LBO transaction as a "merger."
"Our common stock was publicly traded from 1968 until July 2007, when we merged with an entity controlled by investment funds affiliated with Kohlberg Kravis Roberts & Co., L.P. ("KKR"). We are now a subsidiary of Buck Holdings, L.P. ("Parent"), a Delaware limited partnership controlled by KKR. Our 2007 merger and the related financing transactions described herein are collectively referred to in this prospectus as the "Merger Transactions."

To be fair, here are some upbeat highlights:

"These initiatives also allowed us to expand our gross profit margin to 29.3% in fiscal 2008, up from 27.3% for the 2007 predecessor period and 28.2% for the 2007 successor period, and 30.8% in the first quarter of 2009 as compared to 28.8% in the first quarter of 2008. We had net income of $108.2 million for the full fiscal year 2008 and $83.0 million for the first quarter of 2009, compared to $5.9 million for the first quarter of 2008. Since our 2007 merger, we have reduced our total outstanding long-term obligations by $540.9 million to $4.1 billion, and we have had no borrowings under our revolving credit facility since the 2008 first quarter, having funded all capital expenditures and working capital needs from operating cash flow. In addition, at May 1, 2009, our cash balance was $434.6 million."

And now the bad. The most important things to note from the filing:

-->> "We will not receive any proceeds from the sale of shares of our common stock by the selling shareholders."

-->> "We have no current plans to pay dividends on our common stock in the foreseeable future. However, we anticipate paying a special dividend of approximately $200 million to our existing shareholders prior to this offering. This dividend will be paid with cash generated from operations."

-->> "Upon the completion of this offering, pursuant to our monitoring agreement, we will pay a fee of approximately $64 million from cash generated from operations to KKR and Goldman, Sachs & Co."

RUN away from this "IPO." The company is receiving none of the cash. You are taking the "other side of the trade" from some extremely smart individuals who are trying to time this exit perfectly, as it is critical to show their investors they can still pull these leveraged transactions off. Most insulting is while puking their shares back to the public, KKR is taking $200million as a parting gift, out of the company's operating cash flow. And they're taking an i-banking fee??!!

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