Tuesday, September 8, 2009

Dollar General could reignite IPOs

At the peak of the credit boom just two to three years ago, cash-flush private equity firms descended on Nashville, snapping up household corporate names like HCA, Dollar General, Thomas Nelson, Central Parking, Direct General and Symbion.
Now, with their investors eager for returns, those acquirers are seeking ways to exit their leveraged buyout deals and ease the portfolios of acquired companies that in some cases are laden with debt.

Last month, Kohlberg Kravis Roberts, the New York-based private equity king, took its initial step by announcing that discount retailer Dollar General would sell $750 million worth of stock to the public and regain its status as a public company.

To many observers, Dollar General's strong performance amid an economic downturn makes it an obvious candidate to take advantage of a crack in the window for bringing new stock issues to the market. But how soon others, including Kohlberg Kravis-backed HCA, follow suit depends on a number of factors. Those are likely to include how much debt is on the company's books relative to cash flow, its growth outlook, and industry and market conditions, analysts said.

"As it relates to health care, you'll probably need to see the resolution on health-care reform legislation before people get into a filing or registration process," said Ken Melkus, senior adviser in Nashville for private equity firm Welsh, Carson, Anderson & Stowe.

"Any potential investor would want to know what the likely impact of legislation will be before they make an investment."

Strategy may not work

Private equity firms often borrow against a buyout candidate's cash flow or assets to fund deals. The strategy is similar to that used by a homeowner who banks on the equity in his or her house to borrow money for another purchase.

Buyout firms hope to make money on investments in a target company by taking it public again within three to five years after a purchase, and by cutting costs, expanding or investing in new technology to boost efficiency. The strategy doesn't always work, though, because sometimes acquisitions come too laden or highly leveraged with debt.

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