KKR – The Dollar General Buyout Harvard Case Solution & Analysis

Background of KKR:

The company Kohlberg Kravis Roberts and Company (KKR) was formed by Henry R. Kravis and George R. Roberts in 1976. KKR & Co. L.P. It was an American based private equity firm. The company was specialized in making leverage buyout transaction (LBO). The company was involved in sponsoring and managing private equity investments. From the beginning of the business, the company has completed over $400 billion transactions and was considered as the leader in the market. One of the best deal which KKR has completed was the leverage buyout of the RJR Nabisco in 1989.That was considered as the largest buyout in the history at that time. The company has completed the investment transactions in around 160 companies. The year 2007 was considered the most favorable and successful era for KKR as they were outstanding in dealing with the private investments and acquired some big private equities.

Background of Dollar General:

The idea of Dollar General Family stores was created by Cal Turner Sr. and his father J.L. Turner in 1939 with a view of making family stores in the low and moderate income areas with the primary target as middle and lower class. In 2007, the company was acquired by KKR, which made the company public in 2009.

Problem Statement:

In the early 2007, KKR Company’s consulting group’s CEO; Dean B. Nelson had a meeting with the Board of Directors of Dollar General. KKR was looking forward to a potential leverage buyout deal. Although Dollar General was not suitable for KKR’s typical portfolio company but still Nelson was confident that this acquisition would bring economies of scale and synergies because of the positive and welcoming response from the management of Dollar General. But the main problem was the determination of the price which KKR could pay in order to acquire Dollar General, another problem faced by KKR was the implementation of adding value to Dollar General. It was observed by Nelson that the management of Dollar General would accept the rational price after being faced by some problems recently. The management of KKR believes that the deal was good enough and they didn’t want to leave this opportunity in the hands of the competitors.

Dollar General was one of the major holders of the market share in the industry. The company holds around 1/4th of the industry’s revenues with an annual growth rate of 3.4%. Dollar General’s targeted market was low to middle income household consumers seeking value-oriented products. Because of the above reasons, the management of KKR believes that the buyout of the Dollar General would be a great deal for KKR as large economies of scale and synergies are expected from the buyout.

If we talk about the price deal associated with the acquisition of Dollar General, the agreed price seems to be a bit too much and that was just because of the value of the company in its own business industry and the expected increase in the sales and gross profit margin of Dollar General. The expected synergies, economies of scale and the goodwill of the company has led the management of KKR to approve high value for the acquisition. Based on our computations and analysis of the pre-acquisition circumstances and the comparable firms analysis, it was observed that Dollar General’s acquisition will certainly bring synergy to both the companies and upon comparison of Dollar General, those with other companies competing in the same industry, it was noted that the decision to acquire Dollar General was fair enough as the comparable analysis shows that the company itself is performing well against the industry average. Refer to the appendices.

Since, the private equity firms specializing in leveraged buyouts acquire private or publically traded companies without employing large amount from their capitals, i.e. they acquire companies with around 40% to 80% from the debt finance. In this case, KKR would use around 77% of the total amount of the deal due to the risk of selecting the fair share price for the acquisition of Dollar General. Dollar General didn’t seem to be a typical high profile company that KKR would acquire but it is believed that the acquisition of Dollar General will surely bring some synergies and the profits of Dollar General will be beneficial for KKR............................

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