99 Cents Only operates 283 stores in four states, most of them in California.… (Irfan Khan, Los Angeles…)
Discount chain 99 Cents Only Stores Inc. said it had received a $1.3-billion buyout proposal from its founding family and a Los Angeles investment firm to take the company private.
Investors viewed the bid as a lowball offer and quickly pushed the stock price beyond the $19.09 a share offered by the Schiffer/Gold family and Leonard Green & Partners.
Several industry analysts said they expected a higher offer to emerge for the company, based in the City of Commerce. Patrick McKeever of MKM Partners said a share price of "something in the low $20s would be fair."
At least one major shareholder didn't wait long to object to the deal. FBR Capital Markets, a Virginia-based investment fund that owns 5.4% of 99 Cents Only shares, said Friday in a filing with the Securities and Exchange Commission that it believed the buyout terms "substantially undervalue" the company.
The offer by the Schiffer/Gold family and Leonard Green, a private equity firm known for retail buyouts that recently helped take apparel chain J.Crew private, reflected a 14% premium over Thursday's closing price of $16.68.
Shares of 99 Cents Only rose $2.90, or 17.4%, to $19.58 on Friday.
The Schiffer/Gold family owns 33% of the company's stock and said it was prepared to contribute a "substantial portion" of its existing shares as part of the transaction. Management didn't spell out how the deal would be financed.
99 Cents Only was co-founded in 1982 by David Gold, now the company's chairman. Gold's son-in-law Eric Schiffer is chief executive of the company, and Gold's son Jeff is its president and chief operating officer. All three are members of the company's seven-member board of directors.
Jeff Gold said Friday that over the years, his family had been approached several times about taking the company private. He declined to say whether there were plans to raise the offer price.
"It's very preliminary; it's moving along," he said of the deal. "From a long-term point of view, we absolutely feel good about the company."
If the offer is accepted, the company's management would probably remain in place, which would be "a big win-win" for the family, said Joan Storms, a retail analyst at Wedbush Securities in Los Angeles.
Storms said going private would also give the company the freedom to execute a number of new strategies without having to answer to investors. It has been criticized in the past for management missteps, including opening stores in Texas, largely seen as a blunder.
The company is currently focused on localizing merchandise based on individual stores' demographics; rolling out more products above the $1 price point, which the company recently began after resisting for years; and opening more locations and expanding to additional states. 99 Cents Only operates 283 stores in four states, most of them in California.
"Those things all probably involve some implementation risk and cost, which would be, I think, advantageous to do as a private company as opposed to a public company," Storms said. "They could do it behind the scenes."
Dollar stores have grabbed market share in recent years as consumers' incomes have been squeezed and as big-box retailers such as Wal-Mart have had difficulty penetrating highly urban areas.
Last week, Family Dollar Stores Inc. rejected a hostile takeover offer from Trian Fund Management, which offered to pay as much as $60 a share for the company, whose shares had been trading at $44.
Dollar stores "used to be junky little stores without national brands and a crummy shopping experience," Storms said. "These companies have really gotten their act together and really validated the dollar chain distribution channel."
In its most recent earnings report, 99 Cents Only reported that its third-quarter profit increased 9% to $26.6 million, or 38 cents a share, from $24.5 million, or 35 cents, a year earlier. Total sales rose 1.7% to $365.4 million, although sales at stores open at least a year — considered an important measure of a retailer's health because it excludes the effect of store openings and closings — fell 0.7%.
"It's fair to say that we have instituted an almost fanatical approach about eliminating waste and increasing productivity," Schiffer said in an earnings call, "and those things hopefully will pay off over the long term."
But 99 Cents Only has faced criticism from Wall Street. The company's stock has gained 79% over the last five years, far less than the 120% gain in shares of Family Dollar and the 203% gain for Dollar Tree Inc. And its operating margins and return on investment have underperformed its rivals'.
"They weren't delivering on their earnings: They seemed to be over-promising and under-delivering," said Brian Sozzi, an equity research analyst at Wall Street Strategies. "The Street wants consistent earnings beats — you have to live up to their expectations."
Still, Sozzi said 99 Cents Only's business was improving and he expected that the new strategies being put in place would help the company expand out of the Southwest.
99 Cents Only said its board would form a special committee of independent directors to consider the buyout proposal.
Times staff writer Tom Petruno contributed to this report.