Stacking Up The Dollar Stores After 99 Cents Only Acquisition

By James Brumley | October 17, 2011 AAA

On Tuesday, private equity firm Ares Management LLC, along with the Canada Pension Plan Investment Board, agreed to buy 99 Cents Only Stores Inc. (NYSE:NDN) for $1.6 billion. At $22 per share, the two groups paid a 7.4% premium to the pre-announcement price, though that's a 32% premium from the price NDN was trading at when 99 Cents Only Stores first announced it was being shopped in March. While that deal is pretty much done pending shareholder approval, the action also puts similar retailers back in the spotlight at potential acquisition targets.

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Actually, the 99 Cents Only Stores Inc. buyout isn't the only one on the board. Family Dollar Stores Inc. (NYSE:FDO) was already targeted back in February. Though no deal was ever made, to see one attempted and another one succeed this close together is a fairly strong hint that more M&A efforts within the group are on the way. (For related reading on M&A, see Biggest Merger And Acquisition Disasters.)

But what exactly did Ares get with the acquisition, and which of the other deep-discount retailers is the next likely target? Let the dissection begin.

Compare and Contrast
All in all, it wasn't a bad deal. Not a great deal, but not a bad one.

For that $1.6 billion, Ares got a company that generated $1.45 billion in sales over the past 12 months, and turned 5.2% of that into a net profit. That roughly translates into a trailing P/E of 20.4. The forward-looking one of 17.1 is even a little juicer.

Was that the best option out there though?

The major alternatives were The Dollar Tree (Nasdaq:DLTR), Dollar General Stores (NYSE:DG), and the already-mentioned Family Dollar. The table below compares the key numbers and ratios for each, along with 99 Cents Only Stores. Note the NDN data is post-acquisition, which reflects a bit of premium. (None of the companies had a tremendous amount of cash or cash equivalents to sweeten the pot.)



Market Cap TTM Revenue TTM Net % Margin TTM P/E Ratio Projected P/E Ratio
99 Cents Only Stores $1.5 B $1.45 B 5.20% 20.4 17.1
The Dollar Tree $9.8 B $6.24 B 7.24% 22.2 17.4
Dollar General $13.5 B $13.74 B 4.76% 20.8 15.0
Family Dollar $6.7 B $8.37 B 4.57% 18.5 13.2

A couple of things stick out when put into this light. One, this isn't exactly the most lucrative business in the world. Reliable? Yes. But it's not the most high-octane way to make a buck.

Two, while the deal had been deemed overpriced by some, if Ares wanted to get in the business, it pretty much paid the going rate; all these numbers are in the same ballpark.

The Bottom Line
As for the next most likely target, the one that's already been named as a target - Family Dollar - is the most affordable and the most economical. While it's margins are the slimmest, they're also the least expensive.

As is always the case, never own a stock simply because it may be bought out, as most rumored buyouts don't happen. If you can get a good value, though, and it does happen to be acquired, so much the better. Family Dollar fits both bills. (For related reading, see Understanding Leveraged Buyouts.)

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