Big Lots at Half-Price Signals 50% Increase: Real M&A

(Corrects story published Sept. 22 in 16th paragraph to add reference to Liquidation World acquisition in quote.)

For buyout firms looking for a deal, Big Lots Inc. (BIG) is now offering the biggest bargain among discount retailers in America.

Big Lots, which sells discontinued and overstocked brand name goods, trades at 13.9 times its so-called free cash flow, according to data compiled by Bloomberg. That’s the cheapest among its closest rivals and half the industry median. As private equity firms circle 99 Cents Only Stores (NDN) and Family Dollar Stores Inc. (FDO), a buyer could pay a 50 percent premium for Big Lots and still get the Columbus, Ohio-based retailer at a lower price than any of its competitors, the data show.

Selling Big Lots would help Chief Executive Officer Steve Fishman hand owners a billion-dollar windfall after retailers returned 10 times as much in the past three years. While Big Lots had hired Goldman Sachs Group Inc. to explore options, the stock plunged 26 percent since its April high as a sale failed to materialize. The slide has made Big Lots even more affordable now to private-equity buyers, Telsey Advisory Group LLC said.

“The truth is, it’s a lot more attractive given the sell- off,” Joe Feldman, an analyst at New York-based Telsey Advisory, said in a telephone interview. “The company is generating strong free cash flow, it’s operating well, and there’s room for upside. It got way oversold.”

The company, which bought Brantford, Ontario-based Liquidation World Inc. in July, doesn’t comment on rumors or speculation, according to Timothy Johnson, vice president of strategic planning and investor relations at Big Lots.

Shareholder Returns

“We’ve got a very unique, very profitable business that generates a lot of cash and we believe we’ve put that cash to very good use as evidenced by some of the growth in the business and the recent acquisition we announced,” he said.

Founded in 1967 as Consolidated International Inc., Big Lots buys items from furniture to toys and small appliances and then sells them for a discount at its more than 1,400 stores.

While Big Lots has more than doubled since Fishman, 60, became CEO in July 2005, it has returned just 3.6 percent over the past three years. In the same span, the average retailer in the Standard & Poor’s 500 Index, the benchmark gauge for American common equity, climbed 37 percent, including payouts.

Big Lots, which surged in February after people familiar with the situation said it was approached by private equity firms, has since lost almost all those gains. The Wall Street Journal reported in May that Big Lots abandoned a plan to sell itself after bids came in lower than it anticipated.

Relative Value

The company may now report the smallest profit increase since the fiscal year ended 2005 after its Liquidation World purchase, analysts’ estimates compiled by Bloomberg show.

“It’s not a fast-growing story by any stretch,” Mark Mandel, an analyst at ThinkEquity LLC in New York, said in telephone interview. “They ran their business up the flagpole trying to attract some strategic buyer to boost the shareholder value. They couldn’t come to terms” because of price, he said.

With Big Lots closing at $32.72 yesterday, the company is now cheaper than any discount retailer, based on the $2.36 a share it generated in cash in the past 12 months after deducting capital expenses. The industry median of 27 times free cash flow is now almost double the 13.9 times multiple for Big Lots, according to data compiled by Bloomberg.

That means a buyer can offer $50 a share for Big Lots, higher than its peak of $44.04 in April, and still acquire the company at a lower valuation than Chesapeake, Virginia-based Dollar Tree Inc. (DLTR), the next cheapest discount retailer.

Free Cash Flow

At 5 times earnings before interest, taxes, depreciation and amortization, a $50-a-share takeover of Big Lots would also be less expensive than 99 Cents of City of Commerce, California, or Matthews, North Carolina-based Family Dollar, which both have offers from buyout firms and trade about 8 times Ebitda.

Big Lots has $2.6 million in net debt and produced $176 million of free cash in the past year.

“The valuation is even more attractive, they generate very strong free cash flow and they have an underleveraged balance sheet,” Anthony Chukumba, an analyst at BB&T Capital Markets in New York, said in a telephone interview. In addition, Big Lots’ acquisition of Liquidation World has “very limited downside and unlimited exponential upside,” he said.

The company has been moving its stores to locations that will bring in more customers, which will spur sales growth and boost productivity, he said. Earnings at Big Lots will also improve as more U.S. consumers, hurt by unemployment that economists forecast will remain above 8 percent through 2013, turn to discount stores, Matt Malgari, Boston-based managing director of equity research at Knight Capital Group Inc. said.

Discount Shoppers

Big Lots will lift per-share profit by 2.8 percent this fiscal year, before increasing by 17 percent and 34 percent the next two years, analysts’ estimates compiled by Bloomberg show.

Shoppers have been “trading down and the number of people who are willing to go out and find a deal would seem to go higher” in a weak economy, Malgari said in a telephone interview. Big Lots is “incredibly well positioned for that type of macroeconomic environment. I’m surprised at how cheap it is,” he said.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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