Dollar General’s stock surged $4.40, or 26 percent, to $21.18 in late morning trade on the New York Stock Exchange.
The deal marks the latest retail push by KKR, which last week approached British drugstore chain Alliance Boots Plc AB.L about an $18.8 billion takeover and joined a bidding group that is considering an offer for British grocery store chain J. Sainsbury Plc SBRY.L.
Dollar General, which operates 8,260 stores, said the acquisition is expected to close in the third quarter.
Including the assumption of $380 million in debt, Dollar General said the deal was valued at about $7.3 billion. The retailer said the price marked a 31 percent premium over its closing stock price on Friday.
The deal is valued at 12-times 2007 cash-flow forecasts, much higher than the average 8.5-times cash flow typically paid by private equity firms in other retail deals, analysts said.
The high price may discourage a rival bidder from pursuing Dollar General, said one arbitrageur who declined to be named.
“We would expect KKR to close underperforming Dollar General stores, pursue price optimization across the chain and manage the business to maximize cash flow (and pay down debt from the transaction),” William Blair & Co. analyst Mark Miller said in a research report.
“In a world of more supercenters, the consumers’ need for fill-in trips -- as an alternative -- should only increase over time,” Miller said.
The deal triggered a rise in shares of other discount retailers. Shares of Family Dollar Stores Inc. FDO.N rose $2.07, or 7.2 percent, to $30.74. Shares of Dollar Tree Stores Inc. DLTR.O added 79 cents, or 2.2 percent, to $36.45.
Although rivals could suffer over the short-term from clearance sales at any Dollar General stores that close, the deal should be seen as a benefit to the sector over the intermediate- and long-term, Miller said.
Lazard and Lehman Brothers served as financial advisers to Dollar General, while Goldman advised KKR.
Our Standards: The Thomson Reuters Trust Principles.