Retailers that survived the recession have become beacons of stability, at least for leveraged-buyout firms that have lots of money on hand and are under pressure to put it to work.

Family Dollar Inc. (FDO) is the latest retailer to capture attention, with activist investor Nelson Peltz's Trian Group offering $55 to $60 a share for the deep discounter, with the $60 representing a 36% premium over Tuesday's closing price and valuing the deal at $7.6 billion.

"I think there is still upside to the stock, even at these prices," according to Mark Giambrone, a portfolio manager with Texas-based asset manager Barrow, Hanley, Mewhinney & Strauss. Giambrone said he doesn't "see any reason" for his firm, which has more than $50 billion in assets under management, to sell the roughly 2.25 million Family Dollar shares--about 1.8% of the deep-discount chain--that filings show it owned at the end of last year.

Giambrone said the Peltz bid could bring other bidders to the table, and he thinks larger rival Dollar General Corp. (DG) is a "very intriguing" possibility, one that "makes tremendous sense." He said such a tie-up would depend on whether there would be antitrust concerns and if controlling Dollar General holder KKR & Co. is so inclined.

LBO firms are setting their sights on the retail industry with gusto, looking for the kinds of companies that most fit their takeout criteria--relatively stable cash flow and manageable debt, plus steady to growing operations that have room for improvement.

These investors typically have time horizons of a few years, during which they hope to improve the company and bring it public again for a handsome profit, ideally in much the same way KKR has done with Dollar General. KKR took Dollar General private in a 2007 LBO and reintroduced it to the public markets just over two years later.

LBO firms are also looking at retailers that, like Family Dollar, don't have poison pills that can hamper a takeover, don't have a lot of insider holdings and whose shares are relatively depressed.

"A number of retailers right now fit the criteria," said Colin McGranahan, retail analyst at Sanford Bernstein.

Patrick McKeever, retail analyst at MKM Partners, said Big Lots Inc. (BIG), 99 Cents Only Stores (NDN) and Fred's Inc. (FRED) could also be targets, "and this latest development gives me greater conviction."

LBO firms have been gravitating to lower-end retailers in many cases because the shares of the companies are depressed compared with their higher-end peers, whose customers seem to have come out of the recession ready to spend, while lower income consumers are still struggling.

"I think it's selective retail," said BHMS's Giambrone, specifically retailers who have "a lot of cash," and "strong balance sheets." Giambrone anticipates the wave of mergers to continue across all markets, not just retail, and will be fueled by acquisitive public companies as well as LBO shops, who are being lured back to the game by easier and cheaper access to debt markets.

Retailers already in the process of being taken private include J. Crew Group Inc. (JCG), with TPG Capital LP and Leonard Green & Partners preparing their $3 billion purchase of the preppy clothing retailer. Jo-Ann Stores Inc. (JAS) agreed to be taken private by Leonard Green for about $1.6 billion less than two months ago. Leonard Green is also said to be considering a bid for BJ's Wholesale Club Inc. (BJ), which said earlier this month that it would explore options that include a sale of the warehouse chain.

Joining BJ's in the group that seems to be angling for a private-equity suitor is A.C. Moore Arts & Crafts Inc. (ACMR), which on Tuesday said it is exploring strategic alternatives including a sale, and indicated it has received third-party expressions of interest. Close-out retailer Big Lots hired Goldman Sachs Group Inc. (GS) to look into the possibility of a sale as well as other options, according to reports last week. Bookseller Barnes & Noble Inc. (BKS), under pressure from an activist investor, last summer began exploring a sale of the company, though Wednesday's bankruptcy filing by smaller rival Borders Group Inc. (BGP) might alter the bookstore landscape.

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com; and Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com
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