1) What do you think are the major risks in this investment?

KKRThe\tDollar\tGeneral\tBuyout In\tFebruary\t2007,\tDean\tB.\tNelson,\tCEO\tof\tKKR\tCapstone,\ta\tconsulting\tgroup\tthat\tworked\texclusively\twith KKR's\tportfolio\tcompanies,\thad\tjust\tfinished\ta\tmeeting\twith\tthe\tBoard\tof\tDirectors\tof\tDollar\tGeneral\tin\tGoodlettsville,\tTennessee.\tHe\twas\teager\tto\tget\tback\tto\this\toffice\tin\tNew\tYork\tand\tstart\tfinalizing\this\tpresentation\tto KKR's\tmanagement\tteam\tabout\tthis\tpotentially\tlucrative\tLBO\tdeal. Even\tthough\tDollar\tGeneral\tdid\tnot\tquite\tfit\tthe\tmold\tof\tKKR's\ttypical\tportfolio\tcompany,\tNelson\twas confident\tthat\tthis\tacquisition\twould\tbe\ta\tsuccess,\tgiven\tthat\tDollar\tGeneral's\tmanagement\tseemed\tvery\treceptive\tand\twelcoming\tof\tthe\tidea.\tHowever,\tthere\twere\ttwo\tbig\tquestions\tstill\tlingering\tin\this\tmind:\tat\twhat\tprice could\tKKR\tacquire\tDollar\tGeneral,\tand\thow\tcould\tit\tadd\tvalue\tto\tthis\tcompany.\tNelson\twas\tconfident\tthat Dollar\tGeneral\twould\taccept\ta\treasonable\tprice,\tespecially\tconsidering\tthe\ttroubles\tthat\tit\thad\tbeen\tfacing\tlately. However,\the\tneeded\tto\tmake\tsure\tthat\tit\twas\tan\tattractive\tenough\tdeal\tfor\tDollar\tGeneral\tto\tavoid\tthe\trisk\tof the\tdeal\tfalling\tinto\tcompetitors'\thands.\tHe\twas\talso\tcertain\tthat\tKKR\thad\tthe\texpertise\tto\timprove\tthe\toperating\tefficiency\tof\tthe\tcompany\tand\tcould\texit\tthis\tinvestment\tin\ta\tfew\tyears.\tHe\tjust\tneeded\tto\tidentify\tthe\tkey drivers\tfor\tvalue\tcreation\tin\tDollar\tGeneral. Kohlberg\tKravis\tRoberts\t&\tCompany\t(KKR) Kohlberg\tKravis\tRoberts\t&\tCompany\t(KKR)\twas\ta\tprominent\tleader\tin\tthe\tprivate\tequity\tindustry,\tspecializing in\tlarge,\tglobal\tbuyout\ttransactions.\tHenry\tR.\tKravis\tand\tGeorge\tR.\tRoberts,\tpreviously\tbuyout\tspecialists\tat\tBear, Stearns\tand\tCo.,\testablished\tthe\tcompany\tin\t1976,\ta\ttime\twhen\tLBO\ttransactions\twere\trelatively\tuncommon. In\t1977,\tKKR\tcompleted\tits\tfirst\ttransaction\twith\tA.J.\tIndustries,\ta\tsmall\tLos\tAngeles-based\tmanufacturer\tof transportation\tand\tmilitary\tproducts\twith\ta\ttotal\tmarket\tcapitalization\tof\t$26\tmillion.\tThis\tinvestment\tyielded profitable\treturns\tafter\teight\tyears.\tMeanwhile,\tKKR's\tLBO\ttransactions\thad\tgrown\texponentially\tby\tthe\tend\tof the\t1970s\tand\tinto\tthe\t1980s.\tThat\tdecade\twas\trich\tin\tfront-page\tnews\tcovering\tLBOs,\tmany\tof\twhich\tfeatured KKR.\tOver\tthe\tyears,\tthe\tcompany\tadded\tsome\tprominent\tcompanies\tto\tits\tportfolio,\tsuch\tas\tSafeway\tgrocery stores,\tDuracell\tbatteries,\tand\tRJR\tNabisco.\tIts\tstrategy\tdeveloped\tfrom\tfocusing\ton\tsound\tprivate\tequity\tfinancing\tand\trestructuring\tbusiness,\tto\tconcentrating\ton\tadding\tvalue\tthrough\toperational\timprovements\tof\ttarget companies.1 KKR\thad\toperations\tin\tthe\tU.S.,\tEurope,\tAsia,\tand\tAustralia.\tPivotal\ttransactions,\tsuch\tas\tthe\tRJR\tNabisco deal\tin\t1989,\tmade\tKKR\tworld\tfamous\tand\ta\tleader\tin\tits\tclass.\tThe\tcompany\tspecialized\tin\tnine\tindustries: chemicals,\tconsumer\tproducts,\tenergy,\tfinancial\tservices,\thealthcare,\tindustrial,\tmedia\tand\tcommunications, retail,\tand\ttechnology.2 2007\twas\tone\tof\tthe\tbest\tyears\tfor\tKKR.\tThe\tcompany\ttook\tadvantage\tof\tthe\tlow\tinterest\tcost\tand\tfavorable\teconomic\tenvironments\tby\tplanning\tseveral\tmega,\tlandmark,\tbuyout\tdeals\tthat\tresembled\tthose\tin\tthe\tglory days\tof\tthe\t1980s.\tFor\texample,\tit\tplanned\tto\ttake\tTexas\tpower\tutility\tcompany\tTXU\t(now\tcalled\tEnergy\tFuture Holdings)\tprivate,\ta\ttransaction\tthat\twould\tprove\tto\tbe\tthe\tlargest\tbuyout\tin\thistory\tat\tthat\ttime.\tThe\tlargest www.kkr.com. 2 Hamilton,\tTaylor.\t\"Private\tEquity,\tHedge\tFunds\tand\tInvestment\tVehicles\tin\tthe\tUS.\"\tIBIS\tWorld\t(2011):\tn.\tpag.\tWeb. July\t7,\t2011. 1 leveraged\tbuyout\tdeal\tin\tEurope\twas\talso\taccomplished with\tthe\tacquisition\tof\tAlliance\tBoots.\tExhibit\t1\tshows KKR's\tLBO\ttransactions\tfrom\t2004-2007. Dollar\tGeneral's\tCompany\tBackground Exhibit\t1.\tKKR's\tRecent\tTransactions Recent\tTransactions Maxeda Avago\tTechnologies\tInc Masonite NXP Capmark TDS\tA/S HCA Biomet Alliance\tBoots First\tData Energy\tFuture\tHoldings\t(TXU) Year\tValue\t(in\tBN) 20042.50 2005$2.80 2005$3.10 20069.00 2006$\t16.80 \t12.402006 2006$\t33.00 2007$\t11.60 2007\t12.40 2007$\t29.50 2007$\t48.40 Dollar\tGeneral\tis\ta\tsmall-box\tretail\tdiscount\tstore\tselling general\tmerchandise\tand\tseasonal\tproducts\tin\tthe\tUnited States.\tIt\twas\toriginally\tnamed\tJ.L.\tTurner\t&\tSon\tInc., founded\tin\t1939\tby\tJ.\tL.\tTurner\tand\tCal\tTurner,\tSr.\tin Scottsville,\tKentucky.\tThe\tcompany\twas\tconverted\tto\tthe first\tdollar\tstore\tin\t1955,\twith\tno\titem\tpriced\tover\t$1. After\tthe\tidea\tcaught\ton,\tthe\tcompany\tconverted\tmany of\tits\tstores\tto\tdollar\tstores.\tSales\tgrew\trapidly,\tand\tthe\tSource:\tkkr.com. company\tearned\tmore\tthan\t$1\tmillion\tin\tnet\tprofits\tby 1967.\tIn\t1968,\tthe\tcompany\tchanged\tits\tname\tto\tDollar\tGeneral\tand\tbecame\ta\tpublicly\ttraded\tcompany.\tIt\twas reincorporated\tas\ta\tTennessee\tcorporation\tand\theadquartered\tin\tGoodlettsville,\tTennessee. As\tof\tMarch\t2,\t2007,\tDollar\tGeneral\toperated\t8,260\tstores\tin\t35\tstates,\tprimarily\tin\tthe\tsouthern,\tsouthwestern,\tMidwestern,\tand\teastern\tUnited\tStates.\tThe\tstores\twere\tmainly\tsmall\tneighborhood\tstores\twith\tmerchandise made\tup\tof\tmost\tpeople's\tbasic\tnecessities.\tIt\toffered\ta\twide\tvariety\tof\tprivate\tand\tnational\tbranded\titems\tat heavily\tdiscounted\tprices,\tabout\t30%\tof\twhich\twere\tpriced\tunder\t$1.\tThe\tmerchandise\tcould\tbe\tclassified\tinto four\tcategories: Highly\tConsumable:\tpaper,\tcleaning\tsupplies,\thealth\tand\tbeauty\tproducts,\tpet\tsupplies,\tand\tfood; Seasonal\tGoods:\tdecorations,\ttoys,\tbatteries,\thome\toffice\tsupplies,\tsmall\telectronics,\tgardening\tsupplies; Home\tProducts:\tkitchen\tsupplies,\tcookware,\tand\tsmall\tappliances; Basic\tClothing:\tclothes\tand\tshoes\tfor\tinfants,\ttoddlers,\tgirls,\tboys,\twomen,\tand\tmen. Exhibit\t2.\tNumber\tof\tDollar\tGeneral\tStores\tin\tEach\tState\tas\tof\tMarch\t2,\t2007 Source:\tDollar\tGeneral\t2006\t10-K\treport. Percent\tsales\tin\teach\tcategory\tfor\tyears\t2004-2006\tare\tillustrated\tin\tExhibit\t3. Exhibit\t3.\tPercent\tSales\tfor\tEach\tCategory\tof\tMerchandise Carried\tin\tDollar\tGeneral\tStores Source:\tDollar\tGeneral\t2006\t10-K\treport. Dollar\tGeneral\twas\ta\tmajor\tplayer\tin\tthe\tdollar\tand\tvariety\tstores\tindustry,\tholding\troughly\ta\tquarter\tof\tthe market\tshare.\tThe\trevenue\tfor\tthe\tindustry\twas\tabout\t$55bn,\twith\tan\tannual\tgrowth\trate\tof\t3.4%.3\tThis\tindustry was\tdriven\tby\tkey\tfactors\tsuch\tas\tper\tcapita\tdisposable\tincome,\tpoverty\tlevel,\tcompetition\tfrom\tbig-box\tplayers such\tas\tWalmart,\tnational\tunemployment\trate,\tand\ttime\tspent\ton\tleisure\tand\tsports.\tThe\tdollar\tstore\tindustry targeted\tlow\tto\tmiddle\tincome\thousehold\tconsumers\tseeking\tvalue-oriented\tproducts,\twith\tstores\tlocated\tprimarily\tin\tinner\tcities\tand\trural\tareas.\tAccording\tto\tthe\tIBIS\tWorld\tReport,\tthe\tsoutheast\tregion,\ta\tregion\twith the\tlowest\taverage\tper\tcapita\tpersonal\tincome\tin\tthe\tUnited\tStates,\taccounted\tfor\t35%\tof\tthe\tindustry\testablishment.\tOther\tareas\twith\ta\thigh\tconcentration\tof\tdollar\tstores\tincluded\tthe\tGreat\tLakes,\tthe\tMid-Atlantic\tregion, and\tthe\tSouthwest.\tBig\tLots,\tFamily\tDollar,\tand\tDollar\tTree\twere\tthe\tkey\tplayers\tin\tthe\tindustry\tcompeting with\tDollar\tGeneral.\tCompetition\tand\tthreats\talso\tcame\tfrom\tbig-box\tstores\tsuch\tas\tTarget\tand\tWalmart,\teven though\tdollar\tstores\thad\tthe\tcompetitive\tadvantage\tof\tbeing\tsmall\tand\tconveniently\tlocated\tfor\teasy\taccess\tand quick\tshopping.\tIn\t2007,\ta\tfavorable\teconomic\tenvironment\treduced\tthe\tdemand\tfor\tdollar\tstores,\tas\thouseholds turned\tto\tdepartment\tstores\tand\tspecialty\tstores\tto\tfulfill\ttheir\tshopping\tneeds. The\tU.S.\tLBO\tIndustry Private\tequity\tfirms\tspecializing\tin\tleveraged\tbuyouts\tacquire\tprivate\tor\tpublicly\ttraded\tcompanies\twith\ta\thigh percentage\tof\tdebt,\tranging\tfrom\t40%-80%\tof\ttotal\tcapital.4\tThis\tallows\tprivate\tequity\tfirms\tto\tacquire\tcompanies\twithout\tcommitting\ta\tlarge\tportion\tof\ttheir\town\tcapital.\tIt\talso\tmakes\tthe\tpotential\treturn\tvery\tattractive as\tleverage\tmagnifies\tequity\treturn.\tThe\tdebt\tinvolved\tin\tLBOs\tcan\tbe\traised\tthrough\tpublic\tor\tprivate\tmarkets. In\tpublic\tmarkets,\tdebt\tfinancing\tis\ttypically\tin\tthe\tform\tof\ta\tjunk\tbond,\ta\thigh-risk\tand\thigh-yield\tdebt\tinstrument.\tIn\tprivate\tmarkets,\tdebt\tis\traised\tthrough\tbank\tloans,\twith\tvarying\tcombinations\tof\tsenior,\tjunior,\tand mezzanine\tfinancing\tat\tdifferent\tinterest\trates\tand\tterms\tof\trepayment.\tThe\tcapital\traised\twill\tthen\tbe\tused\tto pay\tselling\tshareholders\tand\tpay\toff\texisting\tdebt.\tA\ttypical\tLBO\tstructure\tcan\tbe\tseen\tin\tExhibit\t4. Since\tleverage\tis\tcritical\tin\tthe\tsuccess\tof\tan\tLBO,\tit\tis\timportant\tthat\tthe\ttarget\tcompany\thave\ttangible assets\tthat\tcan\tbe\tused\tas\tcollateral\tagainst\tthe\tloans\ttaken\tout.\tIf\ta\tpublicly\ttraded\tfirm\twere\tacquired,\tit\twould be\ttaken\tprivate\tfirst\tso\tthat\toperational\timprovements\tcould\tbe\tcarried\tout\tsmoothly.\tThe\tprevious\tmanagement team\tof\tthe\ttarget\tfirm\tis\tsometimes\tretained\tto\tcontinue\trunning\tthe\tcompany.\tOther\ttimes,\ta\tnew\tmanagement Shim,\tJanet.\t\"IBIS\tWorld\tIndustry\tReport\t45299,\tDollar\tand\tVariety\tStores\tin\tthe\tUS.\"\tIBIS\tWorld\t(2011):\tn.\tpag.\tWeb. July\t4,\t2011. 4The\tlevel\tof\tdebt\twas\tsometimes\tas\thigh\tas\t95%\tof\tcapital\tin\tthe\t1980s. 3 Exhibit\t4.\tA\tTypical\tPrivate\tEquity\tInvestment\tStructure team\tis\tbrought\tin.\tIn\tan\tLBO,\tcash\tflows\tfrom\tthe\ttarget\tcompany's\toperations\tare\ttypically\tused\tto\tpay\tdown the\tdebt.\tAfter\toperational\timprovement\tis\tachieved,\tthe\tprivate\tequity\tfirm\twill\texit\tits\tinvestment\tby\tselling off\teither\tpart\tof\tor\tthe\tentire\tcompany\tfor\ta\tprofit.\tIt\tcan\talso\texit\tby\ttaking\tthe\tcompany\tpublic. The\t1980s\twere\ttimes\tof\tunprecedented\tgrowth\tfor\tthe\tLBO\tindustry.\tTransactions\tduring\tthis\ttime increased\tfrom\t$5\tbillion\tin\t1983\tto\t$77\tbillion\tin\t1989.\tFrom\t1986\tto\t1989,\tLBOs\taccounted\tfor\t20%\tof the\ttotal\tdollar\tvalue\tof\tcompleted\tM&As.\tThese\tLBO\ttransactions\ttypically\ttargeted\tcompanies\tin\tthe\tretail, textiles,\tfood\tprocessing,\tapparel,\tand\tsoft\tdrink\tindustries,\tsome\twith\tas\tlittle\tas\t10%\tof\tequity\tcontributed by\tthe\tprivate\tequity\tfirms.\tAccording\tto\ta\tstudy\tby\tSteven\tKaplan,\tthe\thighly\tleveraged\ttransactions\thad\tsome positive\teffect\ton\tU.S.\tcorporations.5\tThe\tleverage\timposed\tstrong\tdiscipline\ton\tthe\tbuyout\tmanagement.\tIt\talso provided\tmanagement\twith\tsubstantial\tequity\tstakes\tin\ttheir\tcompanies\tto\tincentivize\tthem,\ta\tphenomenon\tnot commonly\tseen\tin\tthe\tdecade\tbefore.\tKaplan\tshowed\tthat\tCEOs\tof\tLBOs\tincreased\ttheir\townership\tstake\tfrom 1.6%\tpre-LBO\tto\t6.4%\tpost-LBO.\tPrivate\tequity\tfirms\tusually\tmonitored\tthe\tprogress\tof\ttheir\tinvestment\tin these\tcompanies\tclosely\tby\thaving\ta\tsmall\tbut\thighly\tinvolved\tboard\tof\tdirectors. The\thigh\tleverage,\thowever,\tdid\tbring\tsome\tcompanies\tto\tdefault.\tRoughly\tone-third\tof\tthe\tLBOs\tcompleted defaulted\ton\ttheir\tdebt,\tincreasing\tthe\tpublic\tcriticism\tand\tconsequent\tregulatory\taction\tagainst\tsuch\thighly leveraged\ttransactions.\tKaplan\tdocumented\tthat\tthe\tLBO\tmarket\teventually\tgot\toverheated,\twhich\tbrought\tthe total\tvolume\tcrashing\tto\tless\tthan\t$6.8\tbillion\tin\tthe\tearly1990s.\tThe\tconclusion\tfrom\tthis\tperiod\twas\tthat\thigh leverage\twas\textremely\trisky,\tand\tsuch\tLBO\ttransactions\twere\tunlikely\tto\tbe\trepeated\tin\tthe\tfollowing\tdecades. The1990s\twere\tcharacterized\tby\ta\tslowing\teconomy\tand\tincreased\tanti-takeover\tlegislation\tand\tregulations. There\twas\talso\ta\tcredit\tcrunch\tthat\tled\tto\tthe\tshrinkage\tof\tthe\thigh-yield\tjunk\tbond\tprimary\tmarkets.\tCoupled with\tthe\teffects\tof\tunsound\tLBO\ttransactions\tin\tthe\tlate1980s,\tthere\twas\ta\tdramatic\tdrop\tin\tLBO\tactivities\tin this\tdecade.\tIt\twas\tnot\tuntil\tthe\tnext\tdecade\tthat\twe\tsaw\tanother\tboom\tera\tin\tthis\tindustry. From\t2003-2007,\tprivate\tequity\texperienced\tanother\trebirth.\tMarket\tconditions\timproved,\tproviding\ta fertile\tground\tfor\tdeals\tto\tbecome\tbigger\tthan\tever.\tThe\tvalue\tof\tglobal-leveraged\tbuyout\tactivity\tincreased\tby\ta compound\trate\tof\t32.5%\tduring\tthis\ttime\tperiod.\tFundraising\tin\tthe\tU.S.\tincreased\tfrom\t$33\tbillion\tin\t2003 Kaplan,\tSteven\tN.\t\"The\tEvolution\tof\tU.S.\tCorporate\tGovernance:\tWe\tAre\tAll\tHenry\tKravis\tNow.\"\t(1997):\tn.\tpag.\tWeb. July\t4,\t2011.\t. 5 4 to\t$282\tbillion\tin\t2007.\tThis\tgrowth\twas\tfueled\tby\thigh\tlevels\tof\tliquidity\tin\tthe\tdebt\tmarkets,\twhich\tled\tto very\tlarge\ttransactions,\talso\tcalled\tmega\tbuyouts.\tBy\tthe\tmiddle\tof\tthe\tdecade,\tLBO\tdeals\tannounced\tin\tthe U.S.\tamounted\tto\t$400\tbillion. The\tDilemma\tfor\tDollar\tGeneral's\tManagement After\tthe\tmeeting\twith\tDean\tNelson\tfrom\tKKR,\tDollar\tGeneral's\tCEO\tDavid\tA.\tPerdue\ttook\tanother\tlook\tat the\tcompany's\trecent\tfinancials.\tThe\tcompany\thad\tbeen\tfloundering\tin\tthe\tpast\tfew\tyears,\tmainly\tdue\tto\tthe following\tissues: Too\tmany\tstores\topened\tin\ta\tshort\ttime Operational\tissuesinventory\tlayaways Slow\tsales\tgrowth\tin\tthe\tnew\tstores Declining\tgross\tmargins\tresulting\tfrom\tslow\tsales\tgrowth Perdue\tthought\tback\ton\thow\tfar\tthe\tcompany\thad\tcome\tsince\the\tstarted\this\tcareer\tthere\tas\tCOO\tin\t2004. He\tparticularly\tremembered\tthe\trecent\taccounting\tscandal,\twhereby\tDollar\tGeneral\twas\taccused\tof\tmanipulating\tits\taccounting\tto\treduce\tpre-tax\tincome\tby\t$143\tmillion.\tWhile\the\tbore\tno\tpersonal\tresponsibilities\tin this\tscandal,\tas\tthe\tcurrent\tchief\texecutive\the\tled\tthe\tcompany\tthrough\ta\tsettlement\tin\t2005.\tDollar\tGeneral paid\t$10\tmillion\tin\tcivil\tpenalties\tand\tincurred\ta\tpermanent\tinjunction\tagainst\tfuture\tviolations.\tManagement neither\tadmitted\tnor\tdenied\tthe\tcharges,\tbut\tthe\tultimate\tresult\twas\tsqueaky-clean\tbalance\tsheets\tand\tincreased insistence\ton\tfinancial\ttransparency.6 Additionally,\tmanagement\thad\tbeen\tworking\thard\tat\tsetting\tstrategic\tpriorities\tso\tthat\tthe\tcompany\tcould be\tsaved\tand\tturned\taround.\tIt\tneeded\tto\tyield\tprofitable\tresults\tlike\tit\tused\tto.\tProject\tAlpha\twas\tan\tinitiative started\ta\tfew\tmonths\tago.\tIts\tmain\tpurpose\twas\tto\timprove\toperations,\tget\trid\tof\tthe\tlayaway\tinventory\tpolicy, stop\topening\tnew\tstores\tin\tthe\tnext\ttwo\tyears,\tand\tfocus\ton\tgrowing\tsales\tin\tthe\texisting\tstores. The\tmeeting\twith\tDean\tNelson\tand\tthe\tmanagement\tteam\topened\tnew\tpossibilities\tfor\tDollar\tGeneral. If\tthe\tdeal\twere\tto\tgo\tthrough,\tDollar\tGeneral\twould\tgain\taccess\tto\tcapital\tas\twell\tas\tconsulting\tservices,\twhich would\tbe\tessential\tfor\ta\tturnaround.\tRecent\tfinancial\treports\tportrayed\ta\tgrim\tpicture,\tshedding\tdoubt\tabout whether\tDollar\tGeneral\twould\tbe\table\tto\treorganize\tby\titself.\tKKR\thad\tshown\tserious\tinterest\tand\thad\thinted at\tan\toffer\tprice\tthat\tthe\tsenior\tleadership\tof\tDollar\tGeneral\tthought\twas\tmore\tthan\treasonable. Dean\tNelson's\tRationale\tBehind\tthe\tDeal On\this\tway\tback\tto\tNew\tYork,\tDean\tNelson\treviewed\tthe\ttransaction\tdetails\tone\tmore\ttime.\tWith\tits\tlong\thistory\tand\texperience,\tKKR\thad\tclosed\tsome\tof\tthe\tmost\timportant\tdeals\tin\tthe\tindustry.\tOn\tthe\tsurface,\tDollar General\tdid\tnot\tappear\tto\tbe\ta\ttypical\thigh-profile\tcompany\tthat\tKKR\twould\tacquire.\tHowever,\tKKR\thad been\tincreasing\tits\tfocus\ton\tacquiring\tgood\tcompanies\tthat\tcould\tfurther\tadd\toperational\tvalue.\tThis\twas\thow Nelson\tgot\this\tjob,\tas\the\thad\tgained\tsignificant\texperience\tin\tretail\tand\tconsumer\tgoods,\thigh\ttechnology,\tand industrial\tgoods\tindustries\tat\tBoston\tConsulting\tGroup.\tAs\ta\tgraduate\tfrom\tthe\tUniversity\tof\tChicago\tMBA program,\tDean\tleveraged\tboth\this\ttheoretical\tknowledge\tgained\tat\tschool\tand\tthe\tmany\tyears\tas\ta\tconsultant\tin his\tnew\trole\tat\tKKR. Dollar\tGeneral\tseemed\tto\tpossess\tall\tthe\ttypical\tcharacteristics\tof\ta\tgood\tLBO\tcandidate.\tIt\thad\tsteady\tand predictable\tcash\tflows\tthat\tcould\tbe\tused\tto\tpay\tdown\tdebt.\tEven\tthough\tnet\tprofit\tdeclined\tby\t60%\tin\tthe\tpast year,\tNelson\tthought\tit\tprovided\tan\texcellent\topportunity\tto\timplement\tsome\tcost-cutting\tinitiatives\tthat\tcould help\timprove\tfinancial\tperformance.\tIn\taddition,\tthe\tmajority\tof\tDollar\tGeneral's\ttangible\tassets\twere\tin\tthe form\tof\tmerchandise\tinventory,\tproperty,\tand\tequipment\tthat\tcould\tbe\tused\tto\tsecure\tbank\tfinancing.\tNelson also\tthought\tthat\tadding\tDollar\tGeneral\tinto\tKKR's\tinvestment\tportfolio\tcould\tpotentially\tprovide\tdiversification\tbenefits.\tSince\tDollar\tGeneral\tcatered\tto\tlower\tand\tmiddle-income\tfamilies,\tit\thad\tthe\ttendency\tto\tdo\twell Taub,\tStephen.\t\"Dollar\tGeneral\tSettles,\tCFO\tDeparts.\"\tCFO.com\t(2004):\tn.\tpag.\tWeb.\t15\tAug\t2011.\thttp://www.cfo. com/article.cfm/3012645/c_3042528?f=todayinfinance_next. 6 5 when\tthe\trest\tof\tthe\teconomy\tstagnated.\tIt\twas\ta\tcompany\tthat\thad\tsecured\ta\tstrong\tmarket\tposition\tand\ta long\thistory\tof\tsuccessful\toperations.\tNelson\tcould\tsee\ta\tclear\texit\tstrategy\tvia\tIPO\tafter\tthe\tcompany\timproved operationally\tand\tfinancially. Nelson's\texpertise\tand\texperience\tin\tconsulting\tretail\tbusinesses\twould\tbe\thelpful\tin\timproving\tthe\toperations of\tthe\tcompany\tHe\talready\thad\tsome\tgood\tideas,\tespecially\tin\tthe\tarea\tof\tmerchandising,\tinventory\tmanagement, and\tstore\tsite\tselections.\tHe\tthought\tthat\tDollar\tGeneral\tcould\trationalize\tits\tproduct\tofferings\tby\teliminating less-profitable\tmerchandise\tand\tadding\tmore\tpopular\titems.\tNew\titems\twould\tattract\tmore\tcustomers\tto\tthe stores,\tand\talso\timprove\tprofitability\tif\tthey\thad\ta\thigh\tprofit\tmargin.\tIn\tterms\tof\tinventory,\tDollar\tGeneral's unsold\tseasonal\titems\tused\tto\tbe\tput\taway\tfor\tthe\tnext\tyear,\ttying\tup\tvaluable\tstorage\tspace\tand\tworking\tcapital. Nelson\tthought\tthat\tthis\tpractice\tought\tto\tbe\tchanged.\tHe\twould\tpropose\tclearance\tsales\tfor\tthose\tseasonal\titems not\tsold\tin\ttheir\tfirst\tyear,\tto\tease\tthe\tcompany's\tfinancial\tburden.\tNelson\talso\tnoticed\tthat\tDollar\tGeneral\thad opened\tup\ttoo\tmany\tnew\tstores\tin\tthe\tlast\tfew\tyears,\tsome\tof\twhich\tcannibalized\tthe\tsales\tof\tits\texisting\tstores. A\tthorough\tfinancial\tand\tlogistic\tanalysis\tneeded\tto\tbe\tdone\tto\tdetermine\twhich\texisting\tstores\tto\tconsolidate and\twhich\tto\tclose\tdown.\tHe\tstrongly\tbelieved\tthat\tall\tthese\tmeasures\tcould\thelp\tstrengthen\tDollar\tGeneral's financial\tperformance\tin\ta\trelatively\tshort\ttime. The\tTransaction\tDetails Nelson\tlooked\tover\tthe\tproposed\tbuyout\tfinancial\tstructure.\tEstimates\tshowed\tthat\tthe\tacquisition\twould\trequire approximately\t$7.3\tbillion\tof\ttotal\tcapital,\t$2.8\tbillion\tof\twhich\twould\tcome\tfrom\tequity\tprovided\tby\tKKR, GS\tCapital\tPartners,\tan\taffiliate\tof\tGoldman\tSachs,\tCiti\tPrivate\tEquity,\tand\tother\tequity\tco-investors.\tKKR\talso received\tdebt\tcommitment\tletters\tfrom\tGoldman\tSachs\tCredit\tPartners\tL.P.,\tCiticorp\tNorth\tAmerica,\tInc.\tand/ or\tits\taffiliates,\tincluding\tCitigroup\tGlobal\tMarkets\tInc.,\tLehman\tBrothers\tInc.,\tLehman\tCommercial\tPaper\tInc., Lehman\tBrothers\tCommercial\tBank,\tWachovia\tBank,\tNational\tAssociation,\tWachovia\tInvestment\tHoldings, LLC,\tand\tWachovia\tCapital\tMarkets,\tLLC,\tall\tpromising\tto\tprovide: \tup\tto\t$3.5\tbillion\tcomprised\tof\ta\tsenior\tsecured\tterm\tloan\tfacility\tand\ta\tsenior\tsecured\tasset-based revolving\tcredit\tfacility \tup\tto\t$1.45\tbillion\tof\tsenior\tunsecured\tnotes\tor\ta\tsenior\tunsecured\tbridge\tfacility\tup\tto\tsuch\tamount \tup\tto\t$650\tmillion\tof\tsenior\tsubordinated\tnotes\tor\ta\tsenior\tsubordinated\tbridge\tfacility\tup\tto\tsuch amount. The\tpreliminary\tanalysis\tshowed\tthat\tshareholders\tof\tDollar\tGeneral\twould\tbe\toffered\t$22\ta\tshare\tin\tcash. Nelson\tglanced\tat\tthe\tstock\tprice\tinformation\tof\tDollar\tGeneral\tin\trecent\tweeks.\tIf\tthe\tprice\tkept\thovering\taround the\taverage\tof\t$16.75\tby\tthe\ttime\tof\tthe\tacquisition,\tKKR's\toffer\tprice\twould\trepresent\tapproximately\ta\t30% premium\tover\tthe\ttrading\tprice.\tThis\tpremium\twould\tbe\thigher\tthan\tsimilar\tdeals\tin\tthe\tindustry,\tmaking\tthis offer\tto\tDollar\tGeneral\teven\tmore\tattractive\tthan\tpreviously\tthought.\tSee\tExhibits\t5\tand\t6\tfor\tmarket\ttransactions\tdata\tand\tmarket\tvalue\tof\tcomparable\tfirms. Exhibit\t5.\tRecent\tDeals/Transaction\tMultiples (All\tin\t$million\texcept\tmultiples\tdata) Acquirer Bain\tCapital North\tWest\tCompany Sun\tCapital\tPartners Target Dollarama Cost-U-Less ShopKo\tStores TransactionValue/Value/ Value\tEBITDA\tEBITDA\tRevenue\tRevenue $1,218.00$100.0012.18\t$600.002.03 $52.42$7.107.38\t$224.700.23 $905.00$184.784.90\t$3,091.380.29 Average\tTransaction\tValue\t/\tEBITDA\t=\t8.15 Average\tTransaction\tValue\t/\tRevenue\t=\t0.85 Industry\tAverage\tPremium\tover\tMarket\tPrice\t=\t26% Source:\tsec.gov/archives/edgar/data. 6 . Exhibit\t6.\tMarket\tMultiples (All\tin\t$million\texcept\tmultiples\tdata) Company 99\tCent\tOnly\tStores BigLots Dollar\tTree Family\tDollar Market Value\tEquity (MV) $1,027.10 $3,750.15 $2,184.26 $3,645.17 Book\tValue Equity\t(BV) $519.23 $1,129.70 $1,167.70 $1,208.39 MV/BV 1.98 3.32 1.87 3.02 EBITDA 39.24 269.09 469.80 451.94 MV/ EBITDA 26.17 13.94 4.65 8.07 Net Income (NI)\tMV/NI $9.76 $124.05 $192.00 $195.11 105.21 30.23 11.38 18.68 EPS $0.14 $1.12 $1.86 $1.26 Average\tMarket\tValue/Book\tValue\tof\tEquity\t=\t2.55 Average\tMarket\tValue/EBITDA\t=\t13.21 Average\tMarket\tValue/Net\tIncome\t=\t41.38 Source:\tsec.gov/archives. Conclusion Darkness\thad\tcovered\tthe\twhole\tof\tNew\tYork\tCity\tby\tthe\ttime\tNelson\tarrived\thome.\tHe\tstarted\tputting\ttogether his\tpresentation\ton\tthe\tdeal\tfor\tthe\tnext\tmorning's\tmeeting.\tHe\tknew\tthat\tthe\tcompletion\tof\tthis\tacquisition would\tmean\ta\tlot\tfor\this\town\tcareer\tadvancement\twithin\tKKR.\tHe\tdid\tnot\tthink\tthere\twould\tbe\tmuch\tdifficulty convincing\tDollar\tGeneral's\tmanagement\tto\tagree\tto\tthe\tdeal.\tThe\tquestion\the\thad\twas\twhether\tthe\tdeal\twould reap Appendix\t1.\tBiographies Dean\tB.\tNelsonKKR\tCapstone Dean\tB.\tNelson\tfounded\tKKR\tCapstone\tin\t2000.\tHe\twas\tformerly\ta\tsenior\tpartner\twith\tthe\tBoston\tConsulting\tGroup, ran\tthe\tfirm's\tChicago\toffice,\tand\twas\ton\tthe\tmanagement\tcommittee.\tAt\tthe\tBoston\tConsulting\tGroup,\the\tfocused primarily\ton\tthe\tconsumer\tgoods\tand\tretail,\tindustrial\tgoods,\tand\tthe\thigh-technology\tindustries.\tMr.\tNelson\tpreviously worked\tat\tShell\tOil\tCompany.\tAt\tKKR\tCapstone,\the\thas\tworked\twith\tAlliance\tImaging,\tDollar\tGeneral,\tEnergy\tFuture Holdings\t(formerly\tTXU\tCorp.),\tOwens-Illinois,\tPRIMEDIA,\tRockwood/Dynamit\tNobel,\tSealy,\tToys\t'R'\tUs,\tThe Nielsen\tCompany\t(formerly\tVNU\tGroup),\tand\tYellow\tPages\tGroup.\tMr.\tNelson\tis\tChairman\tof\tPRIMEDIA\tand\tis\ta Sealy\tand\tDollar\tGeneral\tboard\tmember.\tHe\tholds\ta\tB.S.,\tSumma\tCum\tLaude,\tfrom\tPurdue\tUniversity;\tand\tan\tM.B.A., with\tHigh\tHonors,\tfrom\tthe\tUniversity\tof\tChicago.\t(Source:\tkkr.com) David\tA.\tPerdueCEO,\tDollar\tGeneral Mr.\tPerdue\thas\tserved\tas\tthe\tChief\tExecutive\tOfficer\tof\tDollar\tGeneral\tCorp.\tsince\tApril\t2,\t2003,\tuntil\tJuly\t2007.\tMr. Perdue\tserved\tas\tthe\tPresident\tand\tChief\tOperating\tOfficer\tof\tDollar\tGeneral\tCorp.\tfrom\tOctober\t12,\t2004,\tto\tDecember 4,\t2006.\tHe\tserved\tas\tthe\tChief\tExecutive\tOfficer\tof\tPillowtex\tCorporation\tfrom\tJuly\t2002\tto\tMarch\t27,\t2003.\tMr. Perdue\tserved\tas\tthe\tPresident\tand\tChief\tExecutive\tOfficer\tof\tReebok\tDivision\tat\tReebok\tInternational\tLtd.\tfrom\tJanuary 2001\tto\tJuly\t2002\tand\tits\tExecutive\tVice\tPresident\tof\tGlobal\tOperating\tUnits\tfor\tthe\tReebok\tBrand\tfrom\tOctober\t1999 to\tJanuary\t2001.\tMr.\tPerdue\tserved\tas\tan\tExecutive\tVice\tPresident\tof\tReebok\tInternational\tLtd.\tfrom\tJanuary\t2001\tto July\t2002\tand\tits\tSenior\tVice\tPresident\tof\tGlobal\tSupply\tChain\tfrom\tSeptember\t1998\tto\tOctober\t1999.\tFrom\t1994\tto September\t1998,\tMr.\tPerdue\tserved\tas\ta\tSenior\tVice\tPresident\tof\tHaggar\tInc.,\twhere\the\twas\tresponsible\tfor\tall\taspects\tof operations\tfrom\tplanning\tthrough\tdistribution.\tFrom\t1992\tto\t1994,\the\twas\tbased\tin\tHong\tKong\tand\tserved\tas\tSenior Vice\tPresident\tof\tOperations\tfor\tSara\tLee\tCorp.\tMr.\tPerdue\tserved\tas\tan\tExecutive\tChairman\tof\tthe\tBoard\tof\tDollar General\tCorp.,\tsince\tJune\t2,\t2003\tuntil\tJuly\t2007.\tHe\tserved\tas\tthe\tChairman\tof\tPillowtex\tCorporation\tfrom\tJuly\t2002 to\tMarch\t27,\t2003.\tMr.\tPerdue\tearned\ta\tBachelor's\tdegree\tin\tIndustrial\tEngineering\tand\ta\tMaster's\tdegree\tin\tOperations Research\tfrom\tthe\tGeorgia\tInstitute\tof\tTechnology.\t(Source:\tinvesting.businessweek.com) 8 Appendix\t2.\tDollar\tGeneral's\tConsolidated\tBalance\tSheets (In\tthousands\texcept\tper\tshare\tamounts) Source:\tDollar\tGeneral\t2006\t10-K\tReport. Appendix\t3.\tDollar\tGeneral's\tConsolidated\tIncome\tStatements (In\tthousands\texcept\tper\tshare\tamounts) Source:\tDollar\tGeneral\t2006\t10-K\tReport. 10 Appendix\t4.\tDollar\tGeneral's\tConsolidated\tStatements\tof\tCash\tFlows (In\tthousands) Source:\tDollar\tGeneral\t2006\t10-K\tReport. 11 Appendix\t5.\tProjected\tFinancials\tfor\tDollar\tGeneral Revenues COGS SG&A EBITDA Depreciation EBIT Balance\tSheet\tItems Working\tCapital Total\tDebt Actual 2007 9,169,822 6,801,617 1,919,321 448,884 200,608 248,276 2008 10,086,804 7,161,631 1,916,493 1,008,680 221,910 786,771 2009 11,095,485 7,877,794 2,108,142 1,109,548 244,101 865,448 Projected 2010 12,205,033 8,665,573 2,318,956 1,220,503 268,511 951,993 2011 13,425,536 9,532,131 2,550,852 1,342,554 295,362 1,047,192 2012 14,768,090 10,485,344 2,805,937 1,476,809 324,898 1,151,911 720,589 261,958 504,340 4,500,000 554,774 4,200,000 610,252 3,700,000 671,277 3,000,000 738,405 2,200,000 NOTES:\tChange\tin\tcapital\texpenditure\t(CAPEX)\tis\texpected\tto\tequal\tdepreciation\teach\tyear.\tThe\taverage\tinterest rate\tfor\tthe\tdifferent\ttranches\tof\tdebt\tfor\tDollar\tGeneral\twas\t9%.\tTax\trate\twas\tat\t34%.\tThe\tequity\tbeta\tof\tDollar General\twas\t0.6\tand\tthe\t10-year\tTreasury\tnote\twas\tyielding\t4.8%.\tEquity\tmarket\trisk\tpremium\twas\testimated\tto\tbe 7%.\tAt\tthe\ttime\tof\tthe\tanalysis,\tthe\tstock\tprice\tof\tDollar\tGeneral\twas\thovering\taround\t$16.75. Source:\tCasewriters'\testimates. 12