Market Overview

99 Cents is Big Pimpin', Spend the B's

What was months of speculation over who, or if 99 Cents Only Stores (NYSE: NDN) would get acquired, has ended today, with Ares Management, Canada Pension Plan Investment Board and the Gold/Schiffer family acquiring the company for $22 per share in cash, a 7% premium to yesterday's closing price.

"I am pleased to announce this agreement as it delivers significant value to our shareholders," said Eric Schiffer, CEO in the press release. "We have come to know and respect Ares Management and CPPIB through this process and we believe they will be excellent partners and help us achieve our long term goals as a company. We look forward to continuing to deliver extreme value to our customers and providing a great place to work for our 99ers."

"We are very pleased to be partnering with the Gold/Schiffer family and Canada Pension Plan Investment Board in making this investment in 99 Cents Only Stores," said David Kaplan, a Senior Partner and Founding Member of Ares Management. "We believe that 99 Cents Only Stores is a franchise company and we look forward to working closely with the Company's management team and dedicated employees to continue to expand the business in order to successfully increase the Company's attractive current market position. We are thrilled to be adding 99 Cents Only Stores to our long track record of utilizing our financial capital to facilitate organic growth in the companies in which we invest such as Aspen Dental, Floor and Decor Outlets of America, General Nutrition Centers, Maidenform Brands, Samsonite, and Serta & Simmons Bedding Company."

The saga over 99 Cents Only Stores has gone on for the better part of 2011, with Leonard Green & Partners making a bid for the company at $19.09 per share. Then there were rumors that Apollo Global Management was going after the company, as money has flowed into the dollar store space, with the likes of Bill Ackman, Nelson Peltz, and Warren Buffett owning stakes in 99 Cents competitors, Family Dollar (NYSE: FDO) and Dollar General (NYSE: DG), respectively.

Back in March, when the Leonard Green bid for 99 Cents first appeared, retail analyst Brian Sozzi said that he saw the potential for a raised bid to the low $20 range. He was quoted by Reuters saying, "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. Sozzi was correct in the family having a large stake, but the new bid now has the Gold/Schiffer family involved in it, and includes other bidders as well.

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."

When the company reported first quarter earnings of 25 cents per share on $368.3 million in revenues back in August, the rumors of an additional bid came out.

There has been a renewed interest in the dollar store space like never before in this country. 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. Unemployment continues to remain over 9%, despite a decent September jobs report. Many Americans still believe we are headed for a second recession, or we may have never recovered from the first one. With all of this economic uncertainty, 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 plenty room for expansion. Gas prices have come down somewhat in recent weeks, but consumers are not seeing incomes rise. As of September, consumers incomes have rose 1.9%, compared to a 3.8% inflation rate. 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 clear what private equity, a pension fund and the founding family see in the company.

$1.6 billion for 99 cents. That's big pimpin', baby.

ACTION ITEMS:

Bullish:
Traders who believe that dollar stores will continue to strengthen might want to consider the following trades:

  • Consider the names Ackman, Peltz and Buffett are in. Dollar General and Family Dollar are the two leaders in this space.

Bearish:
This is bearish for the larger retailers, who are losing market share to the dollar stores. Traders who believe that this will continue to happen may consider alternate positions:

  • Wal-Mart (NYSE: WMT) is the major company the dollar stores are going after. The recent chart of Wal-Mart suggests that things are looking up, but the market share worries will continue to be abound for Wal-Mart.

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