CPPIB bags second dollar store chain

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For the second time in four years, the Canada Pension Plan Investment Board is putting its multibillion-dollar balance sheet behind a retail chain that sells goods for about a buck.

Investing alongside U.S. private-equity firm Ares Management LLC, CPPIB has signed a friendly agreement to buy a majority stake in 99 Cents Only Stores for $1.6-billion (U.S.), or $22 a share.

The purchase comes at a time when even the U.S. Federal Reserve Board expects the U.S. economy to struggle for at least two more years, as debt-laden consumers contend with persistent unemployment and stagnant wages.

As stretched budgets force consumers to move down market, large retailers such as Best Buy and Home Depot have been hurt – but not dollar stores, whose profits and stock prices have soared over the past two years.

So far this year the stock of Dollar General Corp., a $13-billion American dollar-store chain, is up 27 per cent. Rival Dollar Tree Inc., a $10-billion chain, has seen its shares skyrocket 43 per cent. The S&P 500 is down 5 per cent over the same period.

Although Canadian consumers are not as hard-pressed as Americans, Dollarama Inc., which trades on the Toronto Stock Exchange, has seen its stock rise 31 per cent this year. Since going public in October, 2009, the shares are up 93 per cent, a huge success story for private-equity firm Bain Capital, which has unloaded its stake in Dollarama over the past two years.

CPPIB has already profited from growth in the sector. The 99 Cents deal echoes its involvement in the Kohlberg Kravis Roberts & Co.-led private equity buyout of Dollar General Corp. in 2007. That deal resulted in an initial public offering two years later. The 17.5 million shares that the CPPIB still holds have risen in price about 75 per cent since the IPO.

The $147-billion pension fund hopes to repeat that success with 99 Cents which, from 2006 to 2009, churned out total profit of $33-million. In the past 12 months alone, it made $75-million.

The size of each party's investment has not been disclosed, but CPPIB and Ares will share 99 Cents with the Gold and Schiffer families, long-time holders who held a 23-per-cent stake as of June 30, according to Capital IQ.

CPPIB referred to the discount sector's strong growth in its statement announcing the deal on Tuesday. "This investment is consistent with our strategy of investing alongside strong partners in an asset that we believe is well-positioned for the long term and has shown good performance in various economic environments," said André Bourbonnais, senior vice-president of private investments.

The details are still being hashed out, but CPPIB appears to be borrowing to pay for its portion of the investment. RBC Dominion Securities and BMO Nesbitt Burns have both committed financing.

Like its peers, 99 Cents' stock has jumped higher this year, but it's hard to tell how much of that stems from a hostile takeover offer it received in March. That offer piqued the interest of other private-equity firms and gave investors reason to believe 99 Cents would be bought at a premium.

To acquire 99 Cents, CPPIB and Ares had to beat out a bid from Leonard Green & Partners worth about $20 per share, or $1.41-billion, according to Reuters. It was Leonard Green's second offer, following a bid worth $19.09 a share in March. Apollo Management LP had also been reported to be in the running, but pulled out in late September because it could not secure financing.

99 Cents is traded on the New York Stock Exchange and operates about 300 retail stores in California, Texas, Arizona and Nevada. While the company will have new owners if shareholders approve the deal, management is expected to remain, including chief executive officer Eric Schiffer and chief operating officer Jeff Gold.

It's not the only dollar-store chain that has been pursued by private-equity firms this year. In March, Family Dollar Stores Inc. rejected a $7-billion takeover bid from Trian, an investment firm led by investor Nelson Peltz.