KKR Cleans House & Cleans Up
Two years after taking Dollar General private, legendary LBO firm Kohlberg Kravis Roberts & Co. (KKR) is preparing to take the company public—with higher margins and significantly more debt. KKR, which has completed over $400 billion in private equity transactions since 1976, is probably best known for its 1989 LBO of RJR Nabisco, the subject of the book Barbarians at the Gate: The Fall of RJR Nabisco. As financial snoops, we couldn’t help but examine the related SEC filings to see both the changes at Dollar General over the last two years and how much money KKR stands to make on the deal.
Dollar General’s wiki page provides a great overview of the company. From 1968 through the end of 2005, its store base grew from 215 in 13 states to over 8,000 in 32 states, and annual sales increased from $40 million to $8.5 billion. But as growth slowed and margins leveled off, the shares began to underperform in 2004. Then, in 2006 management accelerated store closings, discontinued its “pack away” inventory model, and blew out inventory of past seasons’ merchandise. As shown in the table, from 2003 to 2007 same-store-sales growth and margins had declined, and sales per square foot barely increased. But Dollar General produces good returns even while underperforming, and in 2007 the company had over $200 million in cash, minimal debt, and was still generating nearly $150 million in free cash flow each year. Enter KKR.
Underperforming companies with little or no debt and solid cash flow are prime LBO candidates because the buyer can acquire the entire company with little “money down” and use debt to fund the purchase. In the Dollar General case, KKR and a group of investors purchased the company for $7.3 billion. The buyers put up about $2.8 billion of their own money, and funded the rest of the purchase with $4.5 billion of debt.
Since the acquisition, the KKR group has added or replaced eight SVPs, and has focused on SKU optimization, private brands (350 net new brand items since 2007), and accelerated new store growth with an eye toward increasing stores from 8,577 currently to 12,000 (Watch Out Wal-Mart!). The improvement in operating results has been impressive—SSS growth has more than doubled, net sales per square foot is up 14%, and margins have increased significantly. Dollar General ended the July 2009 quarter with over $500 million in cash and $4 billion in LBO-related debt.
So how much money is the KKR group going to make on their successful turnaround of Dollar General? Well, based on the improved operating results and current valuations of comparable companies, the investors’ initial equity investment of $2.8 billion is now worth around $4 billion, a 40%+ return over 2 terrible years in the stock market. In addition, KKR and company will have received over $600 million in deal-related payments since taking Dollar General private—a onetime dividend paid to current shareholders before the IPO ($239 million), LBO-related deal fees ($135 million), interest on the LBO-related debt ($133 million), and other fees and litigation expenses of about $100 million paid to or on behalf of the group out of Dollar General earnings. Finally, KKR will earn more underwriting fees when the new shares of the now debt-laden Dollar General Corp. are sold to…you.
Sara Lee: Give and Take
Sara Lee ($1.5 billion, or 11.4% of sales to Wal-Mart) filed its proxy last week. The company terminated all use of its corporate aircraft and downsized the executive vehicle program. That’s a great gesture on behalf of shareholders. On the other hand, the company doled out nearly $6 million more in pay (almost all in stock grants) to CEO Brenda Barnes. Source: footnoted.org
Political Spending by CPG Companies & Retailers
Want to see how CPG companies dole out political contributions – click here. Excellent interactive graphs, but be sure and use the dropdown menu to sort and scroll over the company’s logo to get a detailed breakdown of political contributions. For example, you’ll see that virtually all of the big food & beverage providers were heavy republican contributors, while personal care products companies gave more to democrats. Source: Chartporn.com
Corporate Perks
Shareholders of Affiliated Computer Services, which provides IT services to consumer packaged goods companies and other industries, are paying heavily to protect the company chairman and founder, Darwin Deason. According to the 10-k, the company shelled out nearly $500,000 last year for security services to “protect” Deason. No other member of executive management receives company paid security. Source: footnoted.org
New Use for Olestra
Hard to believe that it’s been 13 years since P&G launched Olestra. Though still around, the over-hyped food additive never met expectations. Turns out that Olestra’s derivatives are great uses for paints, coatings & stains. Now that goes down smooth. Read the full article here. Source: Forbes.
The Cost of Having Children, Thanks to the Duggars
One of the best written and informative articles we’ve read in a long time. Jonathan Last writes in The Wall Street Journal and provides an economic viewpoint of why birthrates have dropped from 7 to 2 births for U.S. women. Aside from personal preferences, changes in government programs and industrialization helped create strong disincentives to childbearing. One depressing finding: it can cost parents as much as $1.1 million to raise a single child from birth thru the undergraduate years. The article is titled “Duggar Economics: The Cost of 19 Kids.” Subscription required, but it’s worth the price.
The Gompertz Law of Human Mortality
Your probability of dying during any given year doubles every 8 years. British actuary Benjamin Gompertz discovered this fact in 1825. The mathematically-minded can read the paper here.
Couch Potatoes
Even though we’ve seen the data before, it’s still a stunning chart on how much TV Americans watch compared to the rest of the developed world. Source: The Economist.
The Barf Blog
No, it’s not a website your teenager peruses. The site is managed by an associate professor of food safety at Kansas State University. It tracks and provides a useful compilation of foodborne illness/sanitation issues at processing facilities and restaurants. Pay attention to this site if you are in the food business. Check it out here.
Useless Stats:
- There are 22 M&M colors
- 9 billion pieces of Candy Corn are produced annually
- It takes an average of 252 licks to get to the center of a Tootsie Pop (Your tax dollars paid Purdue University researchers to solve this, one of the world’s great mysteries).
From “The Business of Candy” by Fast Company.
They Said It:
“It is commonly said that buying a house is the biggest investment most Americans will ever make. Having a baby is like buying six houses. Except that they don’t increase in value, you can’t sell them and after 16 years they’ll probably say they hate you.”
–Jonathan Last, The Wall Street Journal
Have a thought or comment? Give us a call or email.
Scott Alaniz, CFA
Joe Chumbler, CFA
Rogers (479) 657-6940
Information in this report has been obtained from sources that we believe to be reliable. Boston Mountain Money Management does not guarantee its accuracy or completeness and assumes no responsibility for actions taken with respect to information contained herein. The authors held a position in Wal-Mart Stores and Procter and Gamble at the time of this newsletter.
