The billion Dollar question

Dollar General’s IPO will be a barometer of sentiment as it epitomises many of the issues likely to influence investor appetite for retailers.

First, it’s private equity-owned. KKR bought the value store group for $7.3bn (£4.43bn) two years ago, before the credit crunch really hit. As was typical with such deals, there was a hefty chunk of debt involved and Dollar General is carrying about $4.1bn (£2.49bn).

Debt concern has dogged formerly private equity-owned listed retailers, such as Debenhams, that shouldered heavy burdens when they floated. So attitudes towards Dollar General will be keenly watched by private equity groups here anxious to exit investments.

Despite the credit crunch, debt is not necessarily viewed as toxic. Moody’s, for instance, switched its rating outlook on Dollar General from stable to positive, reflecting the expectation that proceeds of the IPO will be used to pay down debt, and earnings “will continue to improve, leading to a strengthening of credit metrics”. The question is whether investors, burned by the failure of credit agencies to foresee the crunch, will choose to adopt a more cautious view.

Second, the Dollar General IPO is likely to be big. The proportion of stock to be sold has not been revealed but a figure of $750m was used for the purposes of calculating a filing fee – valuing the retailer at about $10bn (£6.07bn).

Retailers interested in floating here may be growing fast, but many are tiny in comparison. The question they will be asking themselves is whether appetite for Dollar General could be extended to them or whether greater scale must still be built.

The progress of Dollar General’s IPO will be watched by potential UK floats ranging from Poundland and 99p Stores to Ocado to Pets at Home, as they ponder whether they can pull off the same here.

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