Barclays on U.S. Food & Drug Retailing: Small-Box Discounters as LBO Candidates
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Barclays on U.S. Food & Drug Retailing: Small-Box Discounters as LBO Candidates
"Private equity interest in retail companies appears to have increased recently, with the just completed LBO of Gymboree (Nasdaq: GYMB) and pending LBOs of J. Crew (NYSE: JCG) and of Jo-Ann Stores (NYSE: JAS). These transactions have focused investors' attention on other retailers that could potentially be taken private. We, too, have reviewed our universe of retailers - specifically the small-box discounters - to determine whether any of them would be suitable LBO candidates. We believe some of the key criteria for a successful LBO include valuation, the outlook for free cash flow generation, ownership structure, and size. Based on our analysis, Big Lots (NYSE: BIG) is the only one of the five small-box discounters we cover that fits these criteria. It has strong free cash flow, expansion potential, broad ownership, and a low valuation. Also, its enterprise value of $2.4 billion means the required debt and equity financing are likely to be readily available."
"All the stocks we reviewed have strong and growing free cash flow, but Dollar Tree (Nasdaq: DLTR) and Family Dollar (NYSE: FDO) both have valuations that are high enough to limit private equity returns. Dollar General (NYSE: DG) is not only valued at a similar level to DLTR and FDO, but its shares are still majority owned by private equity investors following its 2007 LBO. 99 Cents Only Stores (NYSE: NDN) is more reasonably valued and an ideal size."
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"Private equity interest in retail companies appears to have increased recently, with the just completed LBO of Gymboree (Nasdaq: GYMB) and pending LBOs of J. Crew (NYSE: JCG) and of Jo-Ann Stores (NYSE: JAS). These transactions have focused investors' attention on other retailers that could potentially be taken private. We, too, have reviewed our universe of retailers - specifically the small-box discounters - to determine whether any of them would be suitable LBO candidates. We believe some of the key criteria for a successful LBO include valuation, the outlook for free cash flow generation, ownership structure, and size. Based on our analysis, Big Lots (NYSE: BIG) is the only one of the five small-box discounters we cover that fits these criteria. It has strong free cash flow, expansion potential, broad ownership, and a low valuation. Also, its enterprise value of $2.4 billion means the required debt and equity financing are likely to be readily available."
"All the stocks we reviewed have strong and growing free cash flow, but Dollar Tree (Nasdaq: DLTR) and Family Dollar (NYSE: FDO) both have valuations that are high enough to limit private equity returns. Dollar General (NYSE: DG) is not only valued at a similar level to DLTR and FDO, but its shares are still majority owned by private equity investors following its 2007 LBO. 99 Cents Only Stores (NYSE: NDN) is more reasonably valued and an ideal size."
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