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Home Uncategorised

Dollarama IPO: Should you bite?

by Ram Balakrishnan
September 28, 2009
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Dollarama, the largest operator of dollar stores in Canada, is planning to raise about $300 million in an initial public offering. Some discount brokers (RBC Direct Investing is one) are currently asking investors to place an expression of interest in the IPO. The shares are expected to be priced between $16 and $18.

Dollarama has 585 stores across Canada, mostly in Ontario and Quebec and sells knick-knacks priced between $1 and $2. According to the prospectus, the company sold $1.16 billion worth of goods in the 12-month period ending in August 2009, earned a profit of $137 million and reported same-store sales increased 6% compared to year-ago period. It is not clear from the prospectus how much of the company is on offer but news reports indicate that it is 25 to 30 percent, valuing Dollarama at $1 to $1.2 billion.

Unlike most other IPOs (It’s Probably Overpriced), at least at first glance, Dollarama appears to be reasonably priced. Also, there doesn’t seem to be much buzz about the IPO. Recall that Tim Hortons went IPO amidst much fanfare at $27 (if you were lucky enough to get shares at that price) and three years later, the stock is languishing around $30. The current majority owner of Dollarama is Bain Capital, which purchased an 80% stake in 2004 for $1 billion from the company’s founders. A recent Globe and Mail report suggested that Bain Capital is selling a portion of its stake for liquidity purposes:

“Bain wants to move ahead of the Dollar General IPO, while capitalizing on that buzz with investors,” said another investment banker familiar with the fund’s plan, but not working on the IPO. He added that the fund will not initially get private equity’s traditional 15-per-cent-plus expected annual returns on its Dollarama investment, but said: “Bain isn’t really cashing in. They are getting liquidity, but still plan to ride with the company, as they did with Shoppers.”

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