As Backers Sell Dollar General, Just Another Buying Opportunity (DG, FDO, DLTR, NDN, BIG, KKR, BRK-A)

Dollar General Corporation (NYSE: DG) is seeing its stock trade a bit soft this morning on news that private equity backers are selling 25 million shares of common shares at a price to the public of $34.75 per share.  Today’s move is no surprise if you have been tracking the company and the dollar store sector.  In fact, this is likely just another opportunity for those long-term investors.

There is a reason that there has been buyout interest in the sector as Family Dollar Stores Inc. (NYSE: FDO), Dollar Tree, Inc. (NASDAQ: DLTR), and 99 Cents Only Stores (NYSE: NDN) have all either been approached or have been believed to be possible private equity targets.  Ditto for the discounter that is no dollar store of Big Lots Inc. (NYSE: BIG).

Dollar General remains one of our Top Stocks To Own for the Next Decade despite its price rise.  We have said, each time the private equity backers sell it just gives you a free discount to buy shares.  Is it just a coincidence that Dollar General was recently added as a new Warren Buffett stock as Berkshire Hathaway Inc. (NYSE: BRK-B)?  Team Buffett has almost 1.5 million shares of common stock now.  Berkshire will likely buy more stock, and we would not be shocked at all if the conglomerate bought shares in this 25 million share offering.  Buffett and his portfolio managers understand the secular trends here that are working for the dollar stores.

Kohlberg Kravis Roberts & Co. (NYSE: KKR) still has control over Dollar General even after today’s offering.  This will not be the last secondary offering from them.  If you look at the history of these secondary stock offerings from KKR each dip has been simply another opportunity to get into Dollar General shares cheaper than before.

Citigroup, Goldman Sachs, and KKR, along with BofA Merrill Lynch and J.P. Morgan, were the joint book running managers; co-managers are Barclays Capital, Wells Fargo, Sanford C. Bernstein, CICC, Deutsche Bank, and HSBC.

As the float has grown larger and larger, each successive secondary offering is less and less dilutive to the float.  That is why shares are down only 1.3% at $34.54 today and why the share sale commanded only about a 1% discount.  The consensus price target from Thomson Reuters is $39.60, and the 52-week trading range is $26.65 to $37.13.

JON C. OGG