It was the year of the discount retailers. While most sponsor-backed retailers were clawing their way out from a deep recession, Dollar General Corp. and Dollarama Inc. -- and their sponsors -- were raking cash in.
Amid recovering public markets, Bain Capital LLC's Dollarama and Kohlberg Kravis Roberts & Co.'s Dollar General seized upon an opening last fall and pulled off adroitly timed initial public offerings that allowed the sponsors to each triple their money in realized and unrealized gains.
First out of the gate was Dollarama, listing on the Toronto Stock Exchange in October. The next month, Dollar General followed suit on the New York Stock Exchange. Both benefited from pent-up demand in the IPO markets for solid performers as exemplified by the two retailers, which have roughly doubled earnings since their buyouts. Their shares are trading around 40% higher than their IPO prices.
Dollar General produced a quicker partial exit for KKR, which has reaped a partly realized gain of 3.5 times its original $1.26 billion cost. Dollar General's leveraged buyout, struck during the boom in July 2007 but completed amid a collapsing credit market, didn't look like a bargain three years ago.
Along with Goldman Sachs Capital Partners, Citigroup Global Markets Inc., Wellington Management Co. LLP and CPP Investment Board, KKR took it private for $7.5 billion, a price that worked out to a lofty 10.9 times trailing Ebitda. Many judged KKR had overpaid.
"People didn't understand where we were going to create value," recalls KKR partner Mike Calbert. His firm saw a "big underperformer" whose business could be vastly improved under new management, and one that would be resilient in good times and bad.
Viewed as a mini Wal-Mart Stores Inc., the Goodlettsville, Tenn.-based company sells low-priced household products, food and apparel, with 8,965 stores in 35 states as of April 30. It rang in $1.287 billion of trailing Ebitda last year, up from $658 million at the time of the buyout. Ebitda margins expanded to almost 11%, from 7%, and debt shrank to 2.5 times Ebitda, from 7.1 times at the time of the LBO.
Led by CEO Rick Dreiling, the new management team completely transformed the business, says Calbert. It began with "fact-based" decisions on real estate site selection and product mix, identifying which items were making good margins. It then pared the number of products in each category. It offered higher-quality items at comparable prices, attracting a higher income bracket.
While it's difficult to pinpoint how much of its business benefited from consumers trading down in a weak economy, says Calbert, the quality improvements should have helped in retaining them.
Unlike Dollar General, the much smaller Canadian chain Dollarama does not sell perishable food or dairy, and up until February 2009 everything it carried actually sold for C$1. It later expanded the range of products offered by lifting the cap on each of its categories to C$2, a move that boosted same-store sales growth to around 8%, from what had been a steady 3%, says a source familiar with the situation.
Bain invested C$374 million ($362 million) in a C$1 billion LBO in December 2004, taking an 80% stake in the Montreal-based retailer. Since then, trailing Ebitda has doubled, to close to C$200 million, and its debt level has dropped to just over 2 times Ebitda, from about 6 times upon deal closing.
At the time of the LBO, founder Larry Rossy was looking for a partner to double or triple Dollarama's store count and expand the chain into Canada's western provinces, the source says. It now sells everyday staple goods at 611 stores, up from 330 before partnering with Bain.
KKR and Bain have each taken considerable money off the table, though both continue to own significant stakes in the retailers. Bain has realized a total C$760 million, roughly doubling its original investment via refinancings, the IPO and two subsequent secondary offerings. Including the unrealized value of its 30% stake, the Boston firm has reaped about 3.5 times its cost after five years.
KKR has recouped $605 million total, or about half its investment, thanks to a cash dividend plus proceeds from the IPO and a secondary sale of shares in April. Its remaining 36% interest is now worth around $3.75 billion.
For a couple of wagers on dollar discount stores, that's no small change.