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Don’t Pay Up for This Trade-Down Retailer

The IPO of discount store Dollar General isn’t cheap enough, Cramer said Monday. Unless investors can get a better price on the deal, they should take a pass.

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With its higher store count and superior sales, Dollar General is “a bigger and better version” of Family Dollar , Cramer said, but he thinks FDO is the better stock. The Mad Money host sees a number of warning signs in the offering, and he urged viewers to take note.

The biggest problem? Price. Dollar General, which will trade under the ticker symbol DG, is being sold in a range between $21 and $23. Shareholders might see a pop if the deal opens at $22, but even then the stock looks expensive. That would put the price-to-earnings multiple at 7.7 times 2010 earnings, compared with Family Dollar’s 5.9. Dollar General may deserve a premium given its stronger fundamentals, Cramer said, but not 30%.

There’s also the insider selling that’s made Cramer wary. When insiders want out, you usually don’t want in. And majority stakeholder KKR Financial Holdings plans to dump about a third of the total shares being sold. Nor does Cramer like the fact that KKR will remain in control in such a way that Dollar General won’t need to comply with certain corporate governance requirements. Not to mention, there’s about $3.7 billion in debt that will weigh on the books even after the deal.

Cramer recommended that investors not pay more than $19 a share for Dollar General.

Otherwise, he said, “I think you could be robbed.”

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