Shares of Dollar General rose as much as 10 percent on the New York Stock Exchange, while rue21 leaped as high as 28.4 percent on the Nasdaq, putting it on pace for one of the biggest first-day jumps of an IPO this year.
In afternoon trade, Dollar General shares were quoted for $22.77 or up 8.4 percent, while rue21 was up 28.4 percent, trading at $24.40.
Dollar General, which is owned by private equity firm Kohlberg Kravis Roberts & Co KKR.UL, priced shares at $21, below expectations, in its initial public offering on Thursday, and raised about $716 million. KKR bought Dollar General for $7.3 billion in July 2007.
If the underwriters that managed the Dollar General deal exercise their right to purchase additional shares, the IPO will become the largest ever U.S.-IPO by a retailer, with proceeds of $823.5 million, according to Thomson Reuters data.
KKR still owns 89.5 percent of Dollar General following the IPO, and analysts said the price was a deliberate effort to stoke interest in subsequent share issues that would allow KKR to sell off gradually its remaining stake in Dollar General and whet appetite for IPOs by other KKR-owned companies.
"It's fairly priced," said Francis Gaskins, president of research firm IPOdesktop.com. "I'm quite confident you are going to have a secondary (offering) from KKR selling more of their stock. They didn't want it to crash and burn."
Despite pricing at the low end of the expected range, Dollar General was still valued more richly than competitors such as Dollar Tree Inc (DLTR) and Family Dollar Stores (FDO) at the IPO price of $21, according to IPOdesktop data using annualized earnings of the most recent six month period.
KKR and rivals such as Blackstone Group (BX) have sought to tap the IPO market to divest themselves of companies in their portfolios.
More than half of the U.S.-listed IPOs since September have been private equity-backed as those investors have sought exits after a two-year freeze in the market.
But many, such as those by Fortress Investment Group's RailAmerica (RA) and Welsh Carson Anderson & Stowe's Select Medical Holdings Corp (SEM), have struggled, with analysts faulting often-aggressive pricing and high debt loads.
Still, Dollar General and rue21's successful debuts will spur other IPOs, analysts said.
Scott Sweet, a senior managing partner with IPO Boutique, said Dollar General's strong debut will likely cause hospital company HCA, which KKR bought with a consortium that included Boston-based Bain Capital, to attempt an IPO shortly.
"The sheer size of Dollar General's IPO and the fact that it worked well when many people doubted it would may change peoples' minds," Sweet said.
Blackstone also recently said it is considering IPOs of up to eight of its portfolio companies.
Nonetheless, given how most private equity-backed IPOs have stumbled in recent weeks, some firms are opting simply to sell their portfolio companies.
BC Partners BCPRT.UL and Apollo Management LP APOLO.UL recently opted to sell Germany's No. 2 cable operator, Unitymedia, to international cable operator Liberty Global for $3 billion rather than going public. The deal is Europe's largest private equity exit this year.
rue21, which operates 500 stores in the United States geared at youths, raised about $128.5 million in the IPO, which priced above expectations at $19 per share.
Funds advised by private equity firm Apax Partners, which is the largest stockholder, did not sell any shares in the IPO. Their stake in rue21 will fall to 57.9 percent from 62.2 percent.
Rue21's same-store sales, or sales at stores open for at least a year, rose 4.1 percent in the six months ended August 1, while overall sales rose 33.3 percent to $233.1 million, with net income of $8.3 million.
Reporting by Phil Wahba and Clare Baldwin; Editing by Steve Orlofsky, Matthew Lewis and Bernard Orr
Copyright (2009) Thomson Reuters