99 Cents Only Stores agrees to $1.6-billion buyout

99 Cents Only Stores Inc. has agreed to be sold in a deal valued at about $1.6 billion, the deep-discount retailer said Tuesday, as investors are eyeing dollar stores that have grown in popularity during the economic downturn.

The City of Commerce chain will be acquired by Los Angeles private equity firm Ares Management and the Canada Pension Plan Investment Board for $22 a share in cash, a 7.4% premium over Monday’s closing price of $20.49.

The chain said the current family management team will remain. Industry experts foresee the new owners expanding the chain beyond its Western base (most of its stores are in California), boosting sales and eventually considering taking the company public again.

The company’s shares climbed 90 cents, or 4.4%, to $21.39 on Tuesday, a day when investors were also handing gains to the chain’s competitors. Chesapeake, Va.-based Dollar Tree Inc. rose 1.2% to $80.26, and Goodlettsville, Tenn.-based Dollar General Corp. was up 1.6% to $39.07.

Deep-discount chains have been seen as appealing takeover targets in recent years as consumers seeking low prices and convenience have flocked to their stores for household essentials.

“There’s been tons of chatter for some time about takeovers for various dollar stores,” said Matt Arnold, an analyst at Edward Jones & Co. “In many instances, they can offer good returns.”

The $22-a-share offer for 99 Cents Only is about 32% higher than the stock’s close March 10, the day before it announced it had received a $1.3-billion buyout proposal from Los Angeles investment firm Leonard Green & Partners and 99 Cents Only’s founding family, which holds a significant minority stake in the company. The market viewed that $19.09-a-share bid as a low-ball offer, and investors quickly pushed the stock above that level.

Like its competitors, 99 Cents Only has profited handsomely as the recession prodded shoppers to seek better bargains. Instead of laying off workers, the discount chain will probably open additional stores and expand into more states to capitalize on the potential for growth, said Brian Sozzi, an analyst with Wall Street Strategies in New York.

“They’ll take the brand outside of California and Texas, where most of the stores are at this point,” Sozzi said. “It’ll be all hands on deck, and they’ll be adding more people.”

Cost-cutting will probably result in better inventory control, analysts say. After lagging behind its competitors, 99 Cents Only has recently been upgrading its computer systems at both the store and corporate level to track the flow of goods more efficiently, said Joan Storms, an analyst at Wedbush Securities in Los Angeles.

“Those kinds of investments enhance store productivity and drive profitability,” she said.

Like many of its competitors, 99 Cents Only may also expand its range of food products and add more name-brand items to attract customers who want a one-stop shop, analysts say. More than half of the chain’s sales already come from food and beverages.

“Many dollar stores are pushing into foods and consumables, devoting quite a bit of space to it, to drive more consistent traffic,” Arnold said. “So far it’s succeeding.”

That success has eaten into slightly higher-priced retailers, such as discount giant Wal-Mart Stores Inc., which has suffered nine straight quarters of declines in same-store sales in the U.S. Dollar stores can take over significantly smaller retail spaces, and as they expand, are often in more convenient places for people to shop compared with sprawling chains such as Wal-Mart, many of whose locations are in far-flung suburbs.

“Believe it or not, Wal-Mart is viewed as a little expensive,” Sozzi said. “Dollar stores are like little army men, surrounding bigger Wal-Marts, opening more stores than Wal-Mart and in smaller locations. And people are shopping there more often and for different items.”

Founded in 1982, 99 Cents Only was a pioneer of the single-price retail concept, with everything priced at 99 cents. Three years ago, the retailer raised the top price of its goods to 99.99 cents, citing inflation and higher costs. It operates 289 stores in California, Texas, Arizona and Nevada.

99 Cents Only said the family of company founder David Gold had approved the Ares offer and would continue to hold a significant minority stake. Chief Executive Eric Schiffer, along with his brothers-in-law Jeff Gold, the company’s president, and Howard Gold, executive vice president, would remain in their positions and serve as directors. David Gold would serve as chairman emeritus.

The deal also has been approved by the company’s board and by a special committee set up to review all buyout proposals. Analysts expect shareholders to approve, and the transaction is expected to close in the first quarter of 2012.

The agreement “delivers significant value to our shareholders,” Schiffer said in a company statement.

“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,” he said.

Beyond that statement, Schiffer would say only that “it’s business as usual. The stores are still going to have great deals, and they are not going to change.”

Ares and the Canada Pension Plan Investment Board declined to comment.

Ares Management also has invested in such businesses as Samsonite, Serta, Simmons Bedding Co., General Nutrition Centers Inc. and Maidenform Brands Inc. The Canada Pension Plan Investment Board invests retirement assets of 17 million Canadians.

“We believe that 99 Cents Only Stores is a franchise company,” David Kaplan, a senior partner and founding member of Ares Management, said in a statement. “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 market position.”

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