Market Overview

Why Is Big Money Going After Spare Change?

There is big money in ninety-nine cents, and even a dollar.

There was a report out this morning from the New York Post that private-equity firm Apollo Management would bid $22 to $24 for 99 Cents Only Stores (NYSE: NDN).

As such, shares of the discount retailer are soaring on the news, as are competitors like Dollar General Corp. (NYSE: DG), Family Dollar Stores Inc. (NYSE: FDO) and Dollar Tree Inc. (NASDAQ: DLTR). There is already an offer out there from Leonard Green for the dollar store retailer, but as recently as August 22, there were rumors that Apollo would bid for the Commerce, Calif.-based company.

The original report from the New York Post said that the Schiffer-Gold family, which owns almost one-third of the company, would work with the highest bidder, and that gave Apollo a chance. Leonard Green bid $19.09 for the company, but many expected a bid in the mid $20's.

Now it looks like it may be happening.

We have seen an increase in "smart money" moving in the dollar store space, with Warren Buffett, Bill Ackman, and others moving into the dollar store space. Buffett announced a stake in Dollar General, while Ackman and Nelson Peltz have significant stakes in Family Dollar.

Back in March, Brian Sozzi of Wall Street Strategies said he saw the potential for a raised bid for 99 Cents Only Stores. In quotes obtained by Reuters, Sozzi said, "It might be on the low side. I can make the case for over $20. It's tough [alternate bid] because it looks like the family is involved here and they have a significant stake," said Sozzi.

Wedbush Securities analyst Joan Storms said the same thing, but thought another bidder would happen. "There may be a competing offer that may emerge," she said in March. "Probably another private equity company that specializes in the consumer."

The American consumer is increasingly getting squeezed by higher prices, almost like an hourglass. Procter & Gamble (NYSE: PG) is taking note, essentially moving away from the middle class, and focusing on the higher end and lower end. At the Delivering Alpha conference earlier this week, Phil Falcone's top pick was Spectrum Brands, (NYSE: SPB), and he said the same thing, that the consumer is increasingly focusing on value.

Never in the history of this country has the income disparity between the high end and the low end been so stark as it is now. With unemployment hovering over 9%, and the economy looking like it could fall off a cliff at any second, Wall Street and private equity titans are increasingly making bets the economy is not likely to pick up as much as they would like you to believe.

99 Cents Only Stores has a mere 285 stores, so there is obviously room for expansion. As consumers struggle with higher gas prices, and inflation denting their wallets, these discount chains have performed reasonably well, given the recent volatility in financial markets. 99 Cents has over $1.4 billion in yearly revenues, no debt, and saw same-store sales grow by 5.9 percent in its most recent quarter. It is clearly an attractive target for private equity firms, and given its small size, the company may wind up being the subject of multiple offers.

If the rumors from the Post turn out to be, Apollo could turn "99 Cents" into a potential gold mine.

ACTION ITEMS:

Bullish:
Traders who believe that Apollo comes in for 99 Cents Only Stores with a new bid might want to consider the following trades:

  • We are seeing the dollar stores move higher, but Leonard Green could come back with another bid for the company. Consider the $24 calls on 99 Cents Only Stores.
  • This could also spark a buyout frenzy in the space, with Family Dollar potentially being the next one to go.

Bearish:
As bad as this sounds, this is bearish for the middle class. Dollar stores beating out places like Wal-Mart (NYSE: WMT) means the economy is hurting more than you would like to believe. That is not good for the health of this country in the long term.

Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: Apollo Global Management Bill Ackman Leonard Green & Partners Nelson Peltz Pershing Square Capital Warren BuffettLong Ideas News Short Ideas Rumors M&A Media Trading Ideas Best of Benzinga

 

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