Dollar General Case

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There can be a number of reasons for a company to go public or private. There are benefits, as well as disadvantages that go along with either course of action (Exhibit 1 for details). When firms decide to go private, they are no longer listed on any stock exchange market. The pressure of keeping accounting regularity and reporting to the public is no longer an issue. Instead, firms can be more flexible to reorganize the business profile as well as the management team. In many cases, shareholders and board members receive very rewarding financial benefits from this transaction. However, in some situations, public firms do not have a choice in the matter, as is the case in a “hostile takeover”. In assessing Dollar General’s performance, we first must conduct an internal comparison, in which the Statement of Income shows both production and period cost had increased greatly which resulted in lower income; meanwhile, Ratio Analysis also points out relatively lower growth in revenues and profit margin. For external comparison, the Income Statement Comparison chart proves (Although DG still lead in net sales) its growth in sales dropped 43.3%, while its peers had significant growth. Refer to ratios analysis in Exhibit 2. In the fiscal year ending Feb. 2, 2007, there was a performance decline caused by 1) ineffective inventory management, 2) real estate profile, and 3) increased SG&A. Inventory amassed due to unsold seasonal items and the store network (over 8000 stores) experienced problems due to its sheer size. Management took challenging steps to resolve #1 and #2 by offering markdown sales and restructuring the shops network. Even so, the profit loss from the markdowns, the additional depreciation expense caused by the store closures and rising SG&A costs of opening new stores all led to a lower net income (Exhibit 2). Mrs. Sadayo’s decision on whether or not to sell her shares depends on two major factors 1) Her financial goals in respect to KKR’s offer and 2) her evaluation of KKR’s offer vs. her vision of DG’s future growth. She may also take into consideration the legal expenses and other risks that come along with renegotiating the price. Based on the analysis of the retail Industry as well as analysis of the company performance and strategic initiatives (Exhibit 2), the offer from KKR can be described as fair and reasonable (high Offer/EBIDTA ratio, 10.9 against industry avg. 8.9). Available documents contain no traces of malicious intent of the management. The recovery of the earnings seems to be possible, however the future growth potential of DG is difficult to estimate because of its size and tough competition. Our recommendation: sell DG and accept KKR offer. Refer to Exhibit 3 for the possible evaluation algorithm. Exhibit 1

For company owners/shareholders: can be + or – depending on the premium and investment goals. | Benefits or “ +”| Negative sides or “-“|
| For current investors/shareholders| For management of the company| Company| For current investors/shareholders| Management of the company| Company| Public company going private| New owner pays premium, high enough to trigger the immediate sale, and sacrifice long-term goals. Usually up to 40% premium.May be a good solution, if company experience difficulties or they are expected.| Acquirer has built the relationship and offers financial bonus, good enough for retirement, or guarantees future employment. So called “golden parachutes”| Avoid regulatory, administrative and financial reporting burden.No risks of stock market speculations and dependency. Avoid bankruptcy and responsibility due to current market and financial position. Growth potential if acquirer is “growth investor”| The offered value may seem to be or is unfair. Thus current shareholders are l forced in the deal, which they don’t like. Hostile acquisition. Need for expensive lawsuits to protect the interest. Risks or loosing the trial and being in the...
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