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Leonard Green Gets No Respect With 99 Cents Only Bid: Real M&A

Leonard Green Gets No Respect With 99 Cents Only Bid
99 Cents has climbed 21 percent since the deal was announced and has traded at an average of 4.3 percent above the offer price. Photographer: Roger Hornback/Getty Images

Leonard Green & Partners LP is trying to buy 99 Cents Only Stores on the cheap, and almost no one says it will succeed unless the deal is valued at least 10 percent more than what is now the lowest bid for a discount retailer in five years.

99 Cents, which carries everything from flip flops to potatoes and balloons, this month traded 7.6 percent above the takeover bid of $19.09 a share from the Los Angeles-based buyout firm, indicating investors expect a higher offer. Including net cash, the acquisition values the company at $1.1 billion, or 7.9 times earnings before interest, taxes, depreciation and amortization, the cheapest for a discount retailer since October 2005, according to data compiled by Bloomberg.

Leonard Green, which is working with the City of Commerce, California-based company’s founding family, made the offer in March after shares of 99 Cents posted the biggest drop among U.S. discount retailers in the prior 12 months. While the chain has yet to expand beyond California, Nevada, Arizona and Texas, it has the second-highest profit margin and the most sales per square foot among rivals and may draw a sweetened offer of $21.09, according to Wall Street Strategies Inc. Dollar Tree Inc. may also bid, BB&T Capital Markets and MKM Partners said.

“Clearly, 99 Cents Only is in play,” said Anthony Chukumba, a New York-based analyst at BB&T. "$19.09 is not going to get it done, and that’s what the market’s telling you.”

Angela Thurstan, a spokeswoman for 99 Cents, and Chesapeake, Virginia-based Dollar Tree’s Timothy Reid didn’t return phone calls requesting comment. Michael Gennaro with Leonard Green declined to comment.

Going Private

Leonard Green and the Schiffer-Gold family, which owns about a third of 99 Cents’ outstanding shares, offered on March 11 to take the company private for $19.09 a share in cash. The deal to buy the 67 percent of the stock not already owned valued 99 Cents at about $1.3 billion, excluding net cash of about $203 million.

The deal’s Ebitda multiple is the cheapest among discount retailers greater than $100 million since private equity firm Sun Capital Partners Inc. agreed in 2005 to buy ShopKo Stores Inc. of Green Bay, Wisconsin, for 6.1 times Ebitda, or $1.1 billion including net debt, data compiled by Bloomberg show.

99 Cents has climbed 21 percent since the deal was announced and has traded at an average of 82 cents, or 4.3 percent, above the offer price. The spread reached its widest on May 10 when it closed at $20.54, or 7.6 percent higher than the joint bid, data compiled by Bloomberg show.

Satisfying Shareholders

“The current group of people who made the offer are going to raise it up in order to satisfy shareholders,” said Brian Sozzi, an analyst with Wall Street Strategies in New York.

Leonard Green, the private equity firm founded in 1989 by Leonard I. Green, has acquired companies from Budget Rent-a-Car Corp. to J. Crew Group Inc. Green died in October 2002 at age 68, less than a year after formally handing over the reins of his firm.

FBR Capital Markets Corp., 99 Cents’ largest non-affiliated investor with about 3.8 million shares, opposed the offer in an April 8 letter to the board, saying it undervalues the retailer.

“The bid that the family made is simply way too low,” Brian Macauley, who oversees $750 million as co-manager of the FBR Focus Fund, part of the firm’s $1.6 billion in client assets, said in an interview.

U.S. Recession

Billionaire investor Nelson Peltz’s Trian Fund Management LP offered 8.5 times to 9.3 times 2012 Ebitda for rival discount retailer Family Dollar Stores Inc. in February, implying a takeout price for 99 Cents of $21.75 to $23.50 a share, Arlington, Virginia-based FBR said in the letter. Family Dollar rejected the $7.7 billion bid in March, and Peltz has since asked the Matthews, North Carolina-based retailer to reconsider.

Discount retailers are luring buyout firms after sales and profits withstood the 18-month U.S. recession that ended in June 2009, the longest since the Great Depression. Shoppers are still seeking lower-priced goods during the recovery.

99 Cents’ board formed a special committee of three independent directors to consider the offer last month, and the Schiffer-Gold family assured investors that they will consider any proposals that may arise. David Gold is the chairman of 99 Cents, and Eric Schiffer is chief executive officer.

Founded in 1982, 99 Cents operates 285 stores, about three-quarters of which are in California, with the rest in Texas, Nevada and Arizona, according to an April statement. In addition to brand-name general merchandise, the store offers perishable groceries, such as tomatoes, eggs and deli meat.

Selling Groceries

Dollar Tree would be the only strategic buyer for 99 Cents because both chains sell the majority of their items at a single price point, unlike Family Dollar and Dollar General Corp. of Goodlettsville, Tennessee, according to BB&T’s Chukumba and Patrick McKeever, an analyst at MKM Partners. Dollar Tree, which had 4,101 U.S. stores as of January, could support almost twice that many, Chukumba said.

“99 Cents Only has much more grocery exposure, not just dry goods but perishable groceries as well, more frozen and refrigerated, and they even sell produce,” said McKeever, who is based in Grosse Pointe, Michigan, and rates 99 Cents “buy” and Dollar Tree “neutral.”

99 Cents makes $289 in revenue per square foot, the most among U.S. dollar stores, according to Wall Street Strategies’ Sozzi. The company also generated 5.3 cents of profit per dollar of revenue in the last 12 months, the second most in the industry, according to data compiled by Bloomberg. That means Dollar Tree with a 6.8 percent profit margin may be the only strategic acquirer that could easily boost efficiency.

Higher Margins

“In retail, sales per square foot is perhaps the key metric,” FBR’s Macauley said. “Given 99 Cents’ historical margins, given their same-store sales in relation to where everybody else is, it makes sense that their future margins could be quite a bit higher. That needs to be recognized by anyone that’s selling or buying this company.”

Leonard Green stepped in after 99 Cents’ shares had fallen almost 2.9 percent in the previous 12 months. Rival retailers’ stock performances ranged from Family Dollar’s gain of 42 percent to Minneapolis-based Target Corp.’s drop of 2.8 percent, data compiled by Bloomberg show. 99 Cents rose 23 cents, or 1.1 percent, to $20.49 today in New York.

“The stock trading up above $19.09 is just recognition that the market sees the value that’s inherent in the business,” FBR’s Macauley said. “This is a deal that makes a lot of sense for strategic and financial buyers. As long as there’s a good process run here, then we think the stock will be taken out at a much higher price.”

Overall, there have been 9,332 deals announced globally this year, totaling $913.2 billion, a 22 percent increase from the $749.6 billion in the same period in 2010, according to data compiled by Bloomberg.

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