NEW YORK:  KKR & Co., the private-equity firm that bought Dollar General Corp. just before the leverage buyout boom collapsed, is taking the discount retailer public at a higher price than investors pay for Wal-Mart Stores Inc.

KKR, Goldman Sachs Group Inc. and other owners plan to sell 34.1 million shares of Dollar General today, according to data compiled by Bloomberg, less than 2 1/2 years after purchasing the Goodlettsville, Tennessee-based company for $7.3 billion. The $784 million sale, which would be the largest initial public offering by a US retailer in at least 17 years, values the discount merchant at as much as 29.5 times earnings, Bloomberg data show. That’s almost twice as expensive as the 15.4 multiple for Walmart, the world’s biggest retailer.

The offering of shares in Dollar General, KKR’s last LBO before credit markets froze in August 2007, comes after an eight-month, 62% rally in the Standard & Poor’s 500 Index helped spur the most American IPOs in almost two years. While sellers reaped $8.7 billion unloading stock since September, three deals were pulled in the past two weeks, and more than half of the IPOs have fallen below their offer price as investors suffered the worst returns on record, data compiled by Bloomberg show.

“There’s definitely a question of whether investors will give them that premium or whether they’ll try to push them down,” said Nick Einhorn, a Greenwich, Connecticut-based analyst at Renaissance Capital LLC, which has specialized in IPO research since 1991.

Taken Private

The IPO would give Dollar General, which was taken private by New York-based KKR in July 2007, a capitalization of about $7.83 billion, based on the high end of the $21 to $23 price range and the 340.6 million shares that will be outstanding after the offering, according to company filings.

The IPO price values the company at 29.5 times reported net income of 78 cents a share in the 12 months ended in July, the company’s regulatory filing showed on Nov. 9. At the midpoint price of $22, Dollar General trades at 28.2 times earnings, data compiled by Bloomberg indicate.

Walmart, which has a market capitalization of $204.3 billion, trades at 15.4 times reported profits, Bloomberg data show. The Bentonville, Arkansas-based company is scheduled to report third-quarter earnings today.

Dollar General’s price-earnings ratio falls to 21.2 times if its first-half profits of $177 million are averaged over a year, which is 43% higher than Walmart’s ratio of 14.8 times estimated 2009 profit, Bloomberg data show.

‘Smoke Has Cleared’

Same-store sales at Dollar General rose 8.6% in its fiscal quarter ended July, according to data compiled by Bloomberg, amid the deepest US recession since the 1930s. Sales at Walmart stores declined 1.5% in the same period.

KKR was “criticized for paying too much” for Dollar General, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting and investment banking firm. “Now when the smoke has cleared and we’re in a train wreck in this economy, and we’re in the biggest consumer trade-down in the history of retailing, Dollar General has wound up in the perfect place.”

Tawn Miller and Emily Weiss, spokeswomen for Dollar General, didn’t return telephone calls yesterday seeking comment. KKR declined to comment, Peter McKillop, a spokesman at the firm, wrote in an e-mailed reply to Bloomberg News.

‘One Time Boost’

Dollar General, which had $4.1 billion in long-term borrowings at the end of July, used about 39% of its operating income for interest payments, data compiled by Bloomberg show. That’s more than 10 times the median amount that interest expenses trimmed from operating income at 10 competing retailers.

“The debt burden is definitely going to be an issue,” Renaissance’s Einhorn said. “They have done a good job in the past couple years definitely, but there is a question of how much of that is real improvement. How much of that is a one-time boost because of the economy that may go away?”

The US economy returned to growth last quarter after a yearlong contraction, expanding at a 3.5% pace, the Commerce Department said last month.

KKR, founded by Henry Kravis with his first cousin George Roberts and their Bear Stearns Cos. colleague Jerome Kohlberg in 1976, is listing Dollar General as investors suffer the worst returns on US IPOs since at least 1995.

AEI, Aviv

AEI, the George Town, Cayman Islands-based former unit of Enron Corp., and Chicago-based Aviv REIT Inc., the real-estate investment trust that operates nursing homes in 21 US states, also postponed offerings in the past two weeks. Both companies were backed by private-equity firms.

The IPOs of 18 US companies that went public in September and October have underperformed the S&P 500 by 0.3%age point on average in the first month of trading, the worst performance in Bloomberg data going back 14 years. Offerings by American companies have beaten the S&P 500 by an average 21.3%age points since 1995, the data show.

“IPO means, ‘It’s probably overpriced,’” said billionaire investor Kenneth Fisher, who oversees $35 billion as chairman of Woodside, California-based Fisher Investments Inc. “IPOs have never been done for the benefit of the purchaser. IPOs are done for the benefit of the company by definition. So the history of IPOs is very clear that they’re money losing activities.”

KKR and its co-investors, New York-based Goldman Sachs and Citigroup Inc., Boston-based Wellington Management Co. and the Canadian Pension Plan Investment Board, spent $2.8 billion of their own cash to take over Dollar General, and borrowed the rest. Including $384 million in debt that Dollar General had at the time, the deal was valued at $7.3 billion.

Dividends

At an IPO price of $22 a share, the stakeholders would reap $251 million from selling 11.4 million shares. That would increase to $364 million if the underwriters exercise an option to purchase an additional 5.12 million shares for their clients.

Dollar General paid a dividend of $239 million to its owners in September, an amount exceeding the company’s operating income in its fiscal second quarter. The retailer doesn’t plan to pay any dividends as a public company, according to the Nov. 9 filing. Citigroup, Goldman Sachs and KKR will also collect fees as underwriters.

Using KKR’s own valuation models, the “fair value” of Dollar General’s common stock was only $12.95 each at the end of May, according to the regulatory filing. Dollar General used two methods to determine the value of its stock: one that estimates the present value of future cash flows and another based on comparable publicly traded companies, the filing showed.

That price was used to set the exercise price for 731,821 stock options that Dollar General granted on May 28.

‘Dramatic Improvement’

The IPO price range of $21 to $23 that KKR is seeking from institutional buyers “was not derived using a formal determination of fair value.” Dollar General said higher sales growth versus its rivals in the first six months of 2009, a 17% increase in the S&P 500 from May 28 through Oct. 27, and the “dramatic improvement” in the market for IPOs since September helped to account for the valuation gap.