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.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Why did Wal-Mart's Stock Take a Fall in 2015?

    Wal-Mart is the largest company in the world, with a sterling track-record of profits and dividends. So why has its stock fallen sharply in 2015?
  3. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  4. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  5. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  6. Investing

    Retailers Rebel Against Black Friday: Bad Move?

    The Black Friday creep may have hit a wall as some stores are shutting their doors on Thanksgiving and even Black Friday to give employees the day off.
  7. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  8. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  9. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  10. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center