Does a Dollar General IPO indicate a frugality bubble?

Updated

Tom Taulli notes on BloggingStocks that private equity firm KKR is in the late stages of planning an IPO for Dollar General, the country's largest chain of small discount retail centers. KKR, along with the private equity arms of Goldman Sachs (GS) and Citigroup (C), acquired the company in July 2007 for a total of $7.1 billion. The timing of a potential IPO speaks volumes about what is in demand on Wall Street -- namely the "frugality trade" -- and the cashing out of a smart seller should be a warning sign to individual investors.

In a difficult market, the valuations placed on an IPO are usually low enough that private equity owners will wait until investor enthusiasm returns. Although the markets have generally been terrible, there are still pockets of demand, and few people are more intimately acquainted with institutional sentiment than private equity firms. While the June 2007 peak of the private equity bubble saw 21 IPOs -- including that of Blackstone (BX) -- the first half of 2009 has seen only 14. But KKR apparently feels that this is the best possible time to sell Dollar General; looking at hot areas of the market and the company's turnaround over the last two years indicates why this might not be so surprising.

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