Dollar General, rue21 IPOs make strong debuts

By Clare Baldwin and Phil Wahba

NEW YORK (Reuters) - Two private equity-owned U.S. retailers, discounter Dollar General Corp (DG.N) and youth apparel chain rue21 Inc (RUE.O) rose in their trading debuts on Friday, in performances that will soothe worries that investor appetite for buyout-backed initial public offerings has waned.

Dollar General shares finished up 8.2 percent at $22.73 on the New York Stock Exchange, while rue21 closed up 27.9 percent at $24.30 on the Nasdaq, in the fourth strongest debut by a U.S.-listed IPO this year.

Historically, IPOs have risen between 10 percent and 12 percent in their first day of trading.

Dollar General, which is owned by private equity firm Kohlberg Kravis Roberts & Co KKR.UL, priced shares at $21, below expectations, in its initial public offering on Thursday, and raised about $716 million. KKR bought Dollar General for $7.3 billion in July 2007.

If the underwriters that managed the Dollar General deal exercise their right to purchase additional shares, the IPO will become the largest ever U.S.-IPO by a retailer, with proceeds of $823.5 million, according to Thomson Reuters data.

KKR still owns 89.5 percent of Dollar General following the IPO, and analysts said the price was a deliberate effort to stoke interest in subsequent share issues that would allow KKR to sell off gradually its remaining stake in Dollar General and whet appetite for IPOs by other KKR-owned companies.

"It's fairly priced," said Francis Gaskins, president of research firm IPOdesktop.com. "I'm quite confident you are going to have a secondary (offering) from KKR selling more of their stock. They didn't want it to crash and burn."

Despite pricing at the low end of the expected range, Dollar General was still valued more richly than competitors such as Dollar Tree Inc (DLTR.O) and Family Dollar Stores Inc (FDO.N) at the IPO price of $21, according to IPOdesktop data using annualized earnings of the most recent six month period.

EASIER EXITS?

KKR and rivals such as Blackstone Group LP (BX.N) have sought to tap the IPO market to divest themselves of companies in their portfolios.

More than half of the U.S.-listed IPOs since September have been private equity-backed as those investors have sought exits after a two-year freeze in the market.

But many, such as those by Fortress Investment Group's RailAmerica Inc (RA.N) and Welsh Carson Anderson & Stowe's Select Medical Holdings Corp (SEM.N), have struggled, with analysts faulting often aggressive pricing and high debt.

Still, Dollar General and rue21's successful debuts will spur other IPOs, analysts said.

Scott Sweet, a senior managing partner with IPO Boutique, said Dollar General's strong debut will likely cause hospital company HCA, which KKR bought with a consortium that included Boston-based Bain Capital, to attempt an IPO shortly.

"The sheer size of Dollar General's IPO and the fact that it worked well when many people doubted it would may change peoples' minds," Sweet said.