Dollar General IPO is a keeper; shares climb 8%

PORTLAND — A strong debut by Dollar General in its first day of trading may signal a warmer reception for public offerings, a market that nearly froze last year and has had a fitful recovery.

Discount retailer Dollar General offered 34.1 million shares priced at $21, raising $716.1 million. Investors clamored for the stock, sending shares up $1.73, or 8.2 percent, to $22.73 on Friday.

The strong start was good news for its owner, investment firm Kohlberg Kravis Roberts (KKR), and other private-equity owners who might be looking to unload portfolio companies and deliver some gains for their investors.

Dollar General was public until 2007, when it was purchased for $6.9 billion by an investment group that included KKR and Goldman Sachs. The company's closing stock price Friday implies a value of $7.7 billion.

KKR, through a subsidiary, remains by far the largest shareholder in the company, owning nearly 90 percent of the outstanding shares.

"I believe this was a litmus test of sorts for the private-equity companies," said David Menlow, president of IPOfinancial.com. "If we continued to have private-equity-sponsored deals come into the marketplace and not work ... it was going to taint the waters for others that were certainly on their way."

Investors, seeing it as a risky investment, shied away from IPOs during 2008, making it one of the slowest years for initial public offerings in more than 20 years. But as the market improved this year, more companies have gone to market.

But not all the recent offerings by private equity firms have gone well, said Scott Sweet, founder of IPO Boutique.

He noted a number of poorly performing offerings, such as Fortress Investment Group IPO for RailAmerica in October, which immediately skidded as investors saw little potential in the railroad company after company insiders increased the number of shares and cut the price in the offering.

Dollar General drew a lot of attention because KKR brought in new management, which helped trim unprofitable stores and improve its performance.

The company did increase the debt load to a hefty level, but many investors liked the offering as discounters like Dollar General have thrived during the recession as shoppers look to them for low-cost deals on a variety of items.

"They need to do more than tie a bow around it," Sweet said.

Dollar General, based in Goodlettsville, Tenn., is one of the nation's largest discount chains with more than 8,500 stores in 35 states. The company sells everything from food to home décor — usually for less than $10 — at its no-frills stores.

The company's pricing came in at the low range of its proposed pricing of $21 to $23.

The company's stock trades under the ticker symbol "DG" on the New York Stock Exchange.

It was one of the largest retail IPOs in years and it was joined by teen retailer Rue 21, which rocketed $5.30, or 27.9 percent, to $24.30 on Friday.

Other companies may soon join. IPO experts say this recent success may make IPO candidates out of companies such as Dunkin' Donuts and Toys R Us, which is also partially owned by KKR.

KKR is a large buyout firm — with companies such as Eastman Kodak and health care and hospital company HCA. The firm recently took Avago Technologies public in August, and IPO experts say HCA and Toys R Us may be next.

Private equity firms are under pressure to deliver some gains for investors and may be looking to unload some companies they've carried for several years.

However, Menlow and others caution that the IPO market is improved from last year, but still far below prior years.

"We are not in a market where IPOs (always) perform," Menlow said. "It's not a must-do for investors just yet."