Can You Spare Some Change?

99 cents to be exact. Shares of discount chain 99-Cents Only Stores NDN are jumping this afternoon, gaining almost 10% after the the New York Post reported this morning that private equity firm Apollo Global Management LLC was going to bid on the company. “Instead of saying Leonard Green is not paying enough, [99 Cents] is saying [Leonard Green] needs to have its bid ready by mid-September,” one source told the Post. The New York Post said it learned from sources that the Schiffer-Gold family would be willing to work with the highest bidder. The family currently owns almost one-third of the company. In March, Leonard Green offered to buy the company for $1.34 billion, or $19.09 per share. Now, it looks like there may be a competing bid from Apollo, which many market strategists expected would happen. Brian Sozzi, of Wall Street Strategies, was quoted by Reuters in March saying he sees the chances of a raised bid. He was skeptical about an alternative bidder back then. "It might be on the low side. I can make the case for over $20. It's tough [alternate bid] because it looks like the family is involved here and they have a significant stake," said Sozzi. Wedbush Securities analyst Joan Storms echoed these sentiments back in March when the bid was first disclosed, but strayed from Sozzi's thought of an alternate bidder. Storms said a bid of around $20 or $21 could emerge. "There may be a competing offer that may emerge," she said in March. "Probably another private equity company that specializes in the consumer." It is interesting that the Wall Street titans are going after dollar stores, while they also say the economy is going to pick up. Warren Buffett disclosed a stake in Dollar General last week DG, the leader in the space, and both Bill Ackman and Nelson Peltz own significant stakes in Family Dollar. At the Ira Sohn conference in May, Ackman said he thinks Family Dollar could be worth $70 per share should the company improve on management led initiatives. Perhaps these bets are a sign that the economy is not likely to pick up as much as they would like you to believe. In quotes obtained by Reuters, Mark Montagna, a retail analyst at Avondale Partners said, “I think it simply tells you that Buffett expects a worsening economy and more people shopping at dollar stores.” 99 Cents Only Stores has a mere 285 stores, so there is obviously room for expansion. As consumers struggle with higher gas prices, and inflation denting their wallets, these discount chains have performed reasonably well, given the recent volatility in financial markets. The company, based in City of Commerce, Calif. is much smaller than its competitors, and thus is much easier to swallow for a private equity firm. There is also the potential for shopping online, which would be a huge boost for the space as a whole. There is the possibility that other private equity firms could start a bidding war for 99 Cents, which would boost valuations in the space, especially for Family Dollar. Dollar General recently returned to the public markets, after being taken private by Blackstone BX. 99 Cents has over $1.4 billion in yearly revenues, no debt, and saw same-store sales grow by 5.9 percent in its most recent quarter. It is clearly an attractive target for private equity firms, and given its small size, the company may wind up being the subject of multiple offers. Leonard Green could come back with a higher offer, sparking a bidding war. ACTION ITEMS:

Bullish:
If investors believe that 99 Cents Only is going to get into a bidding war, they might want to consider the following trades:

• Consider loking at long dated options in the early $20's strike prices, perhaps $20 or $21. Also consider going long the common stock, if there are rumors of multiple bids.

• With so much attention to the space, multiples could begin to expand in the space, so competitors like Dollar General and Family Dollar and Dollar Tree DLTR could benefit.

Bearish:
Unfortunately, this is bearish for the U.S. economy, as consumers are struggling to cope with higher prices. This could be a theme for many years to come if economic policies are not changed in this country.

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