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Dollar General

Dollar General shareholders stand to gain from the proposed deal with KKR, receiving $22 per share, a 31.1% premium over the stock price. Despite a decline in profitability, with a profit margin dropping from 4% to 1.5%, dividends have increased significantly, raising concerns about future liquidity. Overall, the deal is seen as beneficial for shareholders, and approval is recommended.

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42 views2 pages

Dollar General

Dollar General shareholders stand to gain from the proposed deal with KKR, receiving $22 per share, a 31.1% premium over the stock price. Despite a decline in profitability, with a profit margin dropping from 4% to 1.5%, dividends have increased significantly, raising concerns about future liquidity. Overall, the deal is seen as beneficial for shareholders, and approval is recommended.

Uploaded by

jumiche0123
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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1

Dollar General

As a shareholder in Dollar General, the best deal would be for the deal with KKR to be

approved. This is based on various considerations. The first is that the shareholders will benefit

from the deal since they will receive $22 price per share which is a 31.1% premium over the

closing price of the stock on March 9, 2007. Based on the stock price history, the last time the

stock was worth this price was March 2005 and since then it has been on a decline. As such,

financially, shareholders are getting a good price. Secondly, the annual average rate of growth of

the deep-discount sector is 11.8%. However, this rate of growth is unsustainable since it is mainly

driven by new store openings.

The profitability ratios indicate that the profit margin of the company has declined

significantly in 2007 from an average of 4% to 1.5%. However, despite the decline in profits, the

dividends payout has increased from 16% in 2006 to 45.3% in 2007. This is a problem for the

company since it is utilizing the low profits to pay dividends instead of investing in the business

to enhance operations. Based on this, the company can face liquidity issues in the future and the

smartest move would be to sell the company.

In terms of profitability, Dollar General performed below the industry average in 2007. In

2007, the average profitability margin of the leading companies in the deep-discount sector was

2.5% while Dollar General’s profit margin was 1.5%. Although this was not the lowest profit

margin, the decline from 4.1% in 2006 to 1.5% in 2007 was the highest among its competitors,

which is a sign of potential problems for the company in future.


2

KKR’s valuation is high considering the stock price of the company over the last few years. This

is because KKR is paying $22, which is the highest value Dollar General’s price has reached

since 2004.

A non-financial issue relating to the transaction is how the Chairman and CEO will benefit from

the deal. However, this is not an issue since the benefit being received which include the cash

severance payment and the equity awards had already been pre-agreed upon before. The CEO is

only getting what is rightfully theirs as per their employment contract.

Based on these factors, shareholders will benefit from the deal and it should be approved.

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