Leonard Green cozies up to another buyout

March 11, 2011

One private equity firm is cozying up to another buyout. Fresh on the heels of its participation in the unsavory yet successful takeover of retailer J Crew, Los Angeles-based Leonard Green & Partners is teaming up with owner-managers to buy discount chain 99 Cents Only. The $1.3 billion bid offers a mere 14 percent premium. It smells like another sweetheart deal in the making.

The back-door dealings that marred the J Crew acquisition process set a fresh precedent for bad governance. Shareholders fought back against a fig-leaf go-shop provision, won some minor concessions and ultimately voted to sell the company to TPG [TPG.UL] and Leonard Green, who hatched the deal with Millard “Mickey” Drexler, a big J Crew shareholder as well as its chief executive.

Leonard Green is now looking for something cheaper but equally accessible. 99 Cents Only has all the elements of a prime buyout candidate. It has strong cash flow and, beyond the leases held off balance sheet, zero debt. And investors are starting to think bargain retail may have further to run. Billionaire Nelson Peltz tried to pounce last month with an offer of up to $7.6 billion for Family Dollar <FDO.N>.

99 Cents Only has other attractions. The chain is geographically convenient for Leonard Green, with headquarters in the same metropolitan area. Managers at 99 Cents Only also have an outsized influence. The Schiffer/Gold family owns about a third of the company. David Gold is the chairman, Eric Schiffer chief executive and Jeff Gold president and chief operating officer. The three men represent nearly half the seven-member board. The independent directors may be seen as easy targets too.

Two of them — 80-year-old Marvin Holen and 76-year-old Lawrence Glascott — have been entrenched on the board for 20 and 15 years, respectively. Glascott was previously the company’s accountant. The other two directors are also Los Angeles fixtures.

With any luck, the mellow southern California vibe won’t affect how directors think about the offer. It values the 99 Cents Only enterprise at just over seven times the coming year’s estimated EBITDA. Family Dollar rejected something closer to nine times. Even the J Crew deal, for all its shortcomings, at least provided shareholders a full price. Not everything needs to be sold on the cheap at 99 Cents Only.

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