Friday, January 14, 2011

Big Lots (NYSE: BIG), 99 Cents Only Stores (NYSE:NDN) Most Likely LBO Candidates Says Barclays

With the attention of private equity seeming to be focused on the small retail sector lately, Barclays took a look at companies left that could fit the profile of a probable candidate, and feel Big Lots (NYSE:BIG) and 99 Cents Only Stores (NYSE:NDN) are among the few that warrant a real chance of being taken over and going private.

Barclays said, "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 (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 (NDN) is more reasonably valued and an ideal size."

Big Lots closed Thursday at $32.09, gaining $0.41, or 1.29 percent. 99 Cents Only closed at $15.20, losing $0.26, or 1.68 percent.

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