99 Cents Stores In The Buyout Bin

By Greg Sushinsky | August 21, 2011 AAA

According to a New York Post report, deep bargain retailer 99 Cents Only Stores (NYSE:NDN) will receive a buyout offer from private equity firm Apollo Global Management LP (NYSE:APO). Private equity firm Leonard Green & Partners LP had previously made an offer in March. The Post learned from unidentified sources that the Schiffer-Gold family, which owns one-third of 99 Cents Only shares, will now be open to supporting the highest bidder.

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A Hot Sector Stays Hot
In addition to the interest by private equity in 99 Cents Only Stores, there has been widespread interest in the sector for a while now. Family Dollar Stores (NYSE:FDO) received and rejected an offer from Trian Fund Management, Nelson Peltz's group, earlier in the year, claiming it undervalued the chain. Warren Buffett, through his Berkshire Hathaway (NYSE:BRK.A), has invested in Dollar General (NYSE:DG), giving his imprimatur to the sector. The new potential bid for 99 Cents merely ramps up the already high level of interest in the bargain retailers.

99 Cents Only in Play?
The indicators are from the media reports that the Schiffer-Gold family may now consider aligning itself with the highest bidder. The offer from Leonard Green & Partners in March was for $19.09 a share and valued the company at $1.3 billion, and Schiffer-Gold in conjunction with Leonard Green would have taken the company private. Observers have noted that this offer appears too cheap. For example, another discounter (though not a dollar retailer) BJ's Wholesale Club (NYSE:BJ) agreed to be taken private by Leonard Green & Partners along with CVC Capital Partners for $2.8 billion, a 28% premium. It's been pointed out that a premium in or near that percentage would value 99 Cents Stores at nearly $1.8 billion, roughly $25 a share. 99 Cents Only stock rose nearly 10% during the trading day as rumors of the possible new offer spread.

Some Fundamentals
99 Cents Only Stores has had revenue for the last three fiscal years of $1.3 billion in 2009, $1.35 billion in 2010 and $1.4 billion in 2011. Its earnings per share increased from 88 cents in 2010 to $1.06 in 2011. Its net income rose from $60 million in 2010 to $74 million in 2011, though its earnings growth has slowed a bit recently. Prior to the flurry of trading in its stock, the 99 Cents Stores' shares traded roughly in the middle of their 52-week range. The recent closing stock price of $17.99 finds it trading at just under a 17 P/E.

The Bottom Line
One source on the recent potential bid from Apollo Management said that 99 Cents Stores has directed Leonard Green & Partners to have its bid ready by mid-September. Further speculation is that even as far back as April, when the company established an independent committee to evaluate bids, it was a signal for additional bids.

Although 99 Cents Stores doesn't have either the size or the geographic store coverage of some of its rival dollar store chains, there is a twofold economic dynamic working right now. One is that throughout the recession, the dollar stores attempted to attract more middle-income consumers as shoppers and make that a permanent change for when the economy improves. The other is that the economy is still so weak that dollar stores are bringing in more sales regardless of the temporary or permanent nature of the influx. Sales, in this case, are sales. There's certain to be more action from the dollar retailers in what for them is this sweet spot in the sour economy. (For additional reading, see A Primer On Private Equity.)

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