The ranks of publicly owned mass market retailers may soon be reduced by two. In recent weeks both BJ’s Wholesale Club Inc. and Big Lots Inc., have seen their stock prices surge on reports that their managements are exploring possible sales of the companies.


BJís Wholesale Club Inc., Big Lots Inc., Leonard Green & Partners LP, Morgan Stanley, Goldman Sachs Group Inc., Thomas H. Lee Partners LP, Bain Capital LLC, chairman, president, chief executive officer, Steve Fishman, Dollar General Corp., Kohlberg Kravis Roberts & Co., KKR
































































































































































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February 21st, 2011

NEW YORK – The ranks of publicly owned mass market retailers may soon be reduced by two. In recent weeks both BJ’s Wholesale Club Inc. and Big Lots Inc., have seen their stock prices surge on reports that their managements are exploring possible sales of the companies.

Thus far only BJ’s has confirmed that it is “exploring strategic alternatives” following months of speculation after being approached by a private equity firm, Leonard Green & Partners LP, in July. The investment firm had acquired a 9.5% stake in BJ’s and stated in a filing with the Securities and Exchange Commission that it believed the retailer’s shares were undervalued and intended to contact management to discuss options, including additional financing or taking the retailer private.

Last November unconfirmed press reports stated that BJ’s had engaged Morgan Stanley to help set up an auction to sell the company. Those rumors were followed in January by a management shakeup that saw the appointment of a new chief financial officer and executive vice president of club operations.

Big Lots, meanwhile, has not confirmed that it is exploring a possible sale, although Bloomberg News, citing “people with knowledge of the situation,” has asserted that the retailer is working with Goldman Sachs Group Inc. to study such options. The report further claimed that Big Lots has been approached by Thomas H. Lee Partners LP and Bain Capital LLC.

Both BJ’s and Big Lots performed well through the economic downturn, but they have encountered some deceleration in recent quarters. Big Lots reported a tepid 2% rise in sales during its third fiscal quarter, which ended October 30, and its bottom line fell more than 40%.

During a conference call with analysts, however, chairman, president and chief executive officer Steve Fishman pointed out that the sales weakness, which he described as modest, was limited to consumables. The drop in profit was attributed to the sluggish sales and some unusual expenses, including the costs of opening 28 stores in the quarter. However, the company lowered its fourth quarter and fiscal year earnings projection.

At BJ’s, third quarter sales were more robust, rising 4.8% while same-store sales excluding gasoline grew 1.5%. But the warehouse club operator, which relies to an unusual degree on food sales for its top line, experienced a decrease of about 3% in its higher-margin general merchandise categories. Nonetheless, the company raised its earnings targets for the year.

Both companies have seen the value of their stock jump in the wake of possible buyout reports. As of presstime BJ’s share price had risen 13.4% since management revealed its intentions. Big Lots shares, meanwhile, have skyrocketed in value by 28% since the beginning of February. However, at that time Big Lots had seen its share price lose 22.6% of its value since hitting a high of $41.14 in late April 2010.

Analysts and observers have pointed out that both chains likely have strong appeal for private equity firms since they both offer strong free cash flow and healthy balance sheets with little debt.

Dollar General Corp. is being mentioned as an example of the beneficial effects, both for a chain and for its investors, of going private. The chain was acquired by Kohlberg Kravis Roberts & Co. (KKR) in 2007 for about $7 billion.

When the company went public again in November 2009 with an $824 million initial public offering, the total of its stock and net debt, or enterprise value, was around $11 billion (currently $12.6 billion, according to Yahoo Finance), or about 50% more than the total value of KKR’s takeover, according to a Bloomberg report.

Since KKR still holds about 79% of Dollar General’s shares, its investment has provided enviable returns.

However, Dollar General’s situation was arguably different from that of either BJ’s or Big Lots. The dollar store chain’s performance had begun to falter seriously and it needed, as KKR recognized, an infusion of new management.

Both BJ’s and Big Lots have performed well under their current management teams. Big Lots, for example, has achieved five consecutive years of net profit growth since Fishman took over in 2005.

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