Given the current state of the economy and unemployment levels, the discount store sector is drawing significant investor attention. We have seen three buyout candidates emerge so far in 2011. In February, shares of Big Lots Inc. climbed more than 15% in late-afternoon trading when Bloomberg Businessweek, in an unconfirmed report, said that the company was exploring a possible sale after receiving interest from private equity firms. According to a Bloomberg article dated September 23, 2011, Big Lots was trading at 13.9 times its free cash flow, which was half the industry average of 27 times. It thus presented the cheapest buyout opportunity to private equity firms compared with other discount stores such as 99 Cents Only Stores and Family Dollar Stores Inc. S&P believes that for a retailer to be considered for a buyout, it should have a solid business model, healthy cash flows, low debt levels, and expansion potential. We also think that experienced company management is an additional positive for a retailer. Big Lots fits the bill on all counts, as do Family Dollar and 99 Cents Only Stores.
Multiple bidders have shown interest in acquiring 99 Cents Only Stores. In March 2011, the first bid of $19.09 per share in cash (totaling $1.4 billion) came from private equity firm Leonard Green Partners, L.P., in conjunction with members of the founding Schiffer/Gold family (which owns about 33% of the company’s outstanding shares). The company received a second bid of around $24 per share in September from private equity firm Apollo Management, which subsequently backed out of its offer due to funding issues. In October, private equity firm Ares Capital Management, along with Canada Pension Plan Investment Board, made an offer of $22 per share (totaling $1.6 billion), which was accepted. The transaction is expected to close in the first quarter of 2012.