Banking & Finance

Value in Dollar Stores After Family Dollar Buyout Offer (FDO, DG, DLTR, NDN, BIG)

Family Dollar Stores, Inc. (NYSE: FDO) soared last night after announcing that it has received an unsolicited conditional buyout proposal from Nelson Peltz’ Trian Group to acquire Family Dollar in a price range of $55.00 to $60.00 per share in cash.  The deal is subject to due diligence, financing and other conditions.  While the company has said it will “review the proposal in due course,” we really want to see what this does for the valuations of all of the other dollar stores out there.

This will have serious implications for shares of Dollar General Corporation (NYSE: DG), Dollar Tree, Inc. (NASDAQ: DLTR), and even in 99 Cents Only Stores (NYSE: NDN).  We ran a comparison of forward earnings and revenue multiples to derive some implied prices on each of those if the same financial terms were applied for value investing purposes.  Also, don’t forget about the ‘near-dollar’ store of Big Lots Inc. (NYSE: BIG) after it is already up for sale.

The deal comes to $7.6 billion after a 36% premium price to Tuesday’s closing bell, assuming $60.00.  For this year’s Thomson Reuters estimates of $3.12 EPS and $8.54 billion in revenues, that comes to a projected 17.6 to 19.2 times forward earnings and just under 0.9-times revenues.  We have not yet seen it on an EBITDA calculation.

Dollar General Corporation (NYSE: DG) was already taken private and refloated by private equity owners.  Still, this garners greater value for the dollar king… Shares have backed off all the way to $26.93 to a $9.2 billion market cap and shares rose to above $28.00 per share last night. The 52-week range is $22.27 to $33.73.  Unfortunately, its year-end is January rather than August like Family Dollar and that creates a light disparity in apples to apples comparisons.  At $28.00, Dollar General trades at 15.4-times projected earnings of $1.82 EPS and trades at 0.73-times revenues.  If you interpolate the $60 values of Family Dollar, then Dollar General’s comparable valuation would come to about $34.58 on an earnings basis and over $35.00 on a revenue basis.

Dollar Tree, Inc. (NASDAQ: DLTR) has backed off to $50.94 versus a 52-week range of $32.76 to $57.99, and shares were indicated up around $53.00.  At the adjusted price, the market cap would be $6.65 billion.  Based upon Thomson Reuters estimates (again Jan-2011 fiscal year end) of $3.21 EPS and $5.9 billion, it trades at 16.5-times earnings and 1.12-times revenues.  If you interpolate the $60 values of Family Dollar, then Dollar General’s comparable valuation would come to about $60.99 on an earnings basis but only $47.70 on the same revenue basis.

99 Cents Only Stores (NYSE: NDN) closed at $16.40 yesterday with a $1.15 billion market cap and it has a 52-week range of $13.12 to $19.07.  Thomson Reuters has its March fiscal estimates at $1.05 EPS and $1.41 billion in revenues, implying 15.6-times earnings and 0.81-times revenues.  If you used the same $60-valuation of Family Dollar, you would end up with a relative value of $19.95 on an earnings basis and just over $18.00 on a revenue basis.

Let’s not forget about Big Lots Inc. (NYSE: BIG) which is in play now… Keep in mind that Big Lots already has a valuation premium based upon its shares having risen from under $34 to over $40 of late after word that it is up for sale.

As you have seen, the Family Dollar deal would highlight some value at other dollar stores while it may actually not highlight others in as positive of a light.  Again, we have not done EBITDA calculations that private equity buyers love to do.  We do not generally use EBITDA because we know what that translates to. It generally is the “how to leverage the company up and strip out the cash” model.

JON C. OGG

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