Analysis: How Goldman's dollar-store bet reaped a fortune

Goldman Sachs Group Inc has likely generated around $1.2 billion of revenue over six years from its dealings with discount retailer Dollar General Corp, a Reuters review shows. Just don't expect the investment bank to boast about it.

Much of the revenue stems from an equity investment that is lumped into a catchall earnings segment called "Investing and Lending." Goldman created the segment in 2011 to shine some light on how much money it makes from investing its own money, but it still confounds analysts and investors because the bank does not provide details on the performance of individual assets.

The segment can have a large impact on Goldman's results in any given quarter. In the fourth quarter, Goldman reported nearly $2 billion in revenue from Investing and Lending, or 21 percent of overall revenue. Analysts expect the area to boost profits again when Goldman reports first-quarter results next week. Forecasts for the segment's revenue differ widely, from $1 billion to $2.2 billion.

"When you look at investment banking, it's very easy to break out how they will do quarter to quarter," said Rick Scott, chief investment officer at wealth-management firm L&S Advisors, which has about $25 million invested in Goldman shares. "But when it comes to Investing and Lending, what can you say? You certainly don't have the transparency."

The revenue the bank has earned from Dollar General also helps explain why Goldman, perhaps more than rivals, is aggressively looking for ways to continue its principal investing activities without running afoul of regulations such as the Volcker rule, which restricts how much of their own money banks can put at risk. It has lobbied regulators to preserve its merchant banking business and has come up with new structures for investments that are exempt from the rule's provisions.

Goldman is not required to provide details on individual investments when it reports earnings, and the bank declined to confirm or deny Reuters' calculations.

Unlike many of Goldman's investments, Dollar General is a publicly traded company, which means both the bank and the retailer have to disclose more information. A Reuters review of six years of filings with the U.S. Securities and Exchange Commission offers a rare - albeit limited - window into how Goldman profits from betting its own money.

The review shows that Goldman affiliates have nearly quintupled an initial $605 million cash investment in Dollar General, which peddles everything from $1 packs of Snickers bars to $5 packs of toilet paper. The investment was made as part of a $7.3 billion KKR & Co LP-led buyout in 2007.

Goldman has not only helped to turn around the retailer and sell most of its affiliates' holdings at a profit but has also earned money from serving as Dollar General's banker.

The broader KKR-led private-equity group - dubbed "Buck Holdings" in a nod to Dollar General's bargain-basement brand - took the retailer public again in November 2009 for $21 a share.

Since then, Goldman affiliates have generated roughly $2.5 billion of proceeds from stock sales and $77 million in management fees as private-equity sponsors, the analysis shows.

It is impossible from the outside to calculate precisely how much money Goldman itself has made from its Dollar General dealings, because some information is not public. While Goldman earned money from lending to Dollar General, for instance, it is unclear if it held onto that debt or sold it, and whether it booked gains or losses related to such sales.

Publicly available information on its Dollar General dealings nevertheless adds up to $1.2 billion in revenue.

Goldman earned money on Dollar General stock sales through a private equity fund called GS Capital Partners VI, which invests a mix of client money, employee money and Goldman's own money.

The investment bank represents about 25 percent of that fund - meaning that for the Dollar General buyout, Goldman contributed about $151 million in capital and has generated about $650 million in revenue from stock sales and management fees. Goldman's share of the fund's remaining stake in Dollar General amounts to about $70.6 million.

In addition, Goldman has also received at least $58 million of investment banking and underwriting fees for taking the company private and then public again; $479 million of interest payments and repurchase commissions from making a loan to the company; and $56 million for a derivatives trade pegged to that loan, according to filings. It has also earned fees from clients for managing the private equity fund.

"In this transaction, Goldman kind of nailed it - they've done it all," said Michael Driscoll, a former Bear Stearns executive who now teaches finance at Adelphi University.


Goldman does not run the Investing and Lending segment as a single operation. Businesses whose earnings flow into the segment do not share a common management team, and their investment strategies vary widely.

The segment holds standard financial investments like corporate bonds and stocks but has also made a slew of more unusual investments, from a coal mine in Cesar, Colombia, to a 50 percent stake in the crime drama television series "CSI," which it sold in March.

Profits from an elite team called the Special Situations Group also flow into Investing and Lending. That group has a history of making big, profitable bets on troubled assets, including a Japanese golf course and the pizza chain Sbarro Inc.

Not all investments have been a success. Goldman was a sponsor of the $45 billion buyout of Texas utility TXU, which turned into a terrific flop.

Over the long run, Goldman's principal investment has been a big moneymaker, but it also causes unpredictable swings in its fortunes from one year to the next because the bank marks its assets to market. Over the past five years, Investing and Lending has ranged from a pretax loss of $13.5 billion in 2008 to a pretax profit of $4.2 billion in 2010.

"Obviously it brings more volatility to earnings, and that causes some investors and regulators and politicians to be concerned," said David Stowell, a former Goldman executive who teaches finance at the Kellogg School of Management. "But, on balance, I think that Goldman has some talented people - I know them quite well - who run that, and I expect that they are making generally wise decisions."

The opacity of the segment has made the job of analysts and investors harder.

The only investment Goldman details is an equity stake in the Chinese lender Industrial and Commercial Bank of China Ltd, which is big enough to warrant disclosure. The rest of Investing and Lending revenue goes into three buckets: equities, debt and the vague category "other."

In raising estimates for Goldman's first-quarter profits over the past week, analysts have cited Investing and Lending as a big driver. JMP Securities' David Trone said he doubled his estimate for those gains, to $2.2 billion, based on broad market trends, not any specific investments.

On a January 16 conference call to discuss fourth-quarter earnings, six analysts asked Chief Financial Officer Harvey Schwartz for clarity on the segment.

Schwartz said the "idiosyncratic nature" of different portfolios can affect how they are managed but gave few other details.

"In some quarters (the segment) will perform well; in some quarters, we won't perform as well, relative to the marketplace," he said. "But the market will drive that."

Adding to confusion are Investing and Lending's expenses, which typically run $2 billion to $3 billion a year, even though Goldman says it has few employees. Dane Holmes, head of investor relations, said in an March interview that those expenses come from paying people as well as from operating expenses of investments like power plants and mines.

As for Dollar General, it has grown since its leveraged buyout.

It has hired new management, closed 400 unprofitable locations, kept tighter controls on inventory and changed the layout at stores to encourage customers to spend more, turning the company around. Earnings have soared from $138 million in 2006 to $953 million last year, while sales have climbed from $9.2 billion to $16 billion.

And the stock is up 137 percent since its relisting.

(Reporting by Lauren Tara LaCapra and Carrick Mollenkamp; Editing by Dan Wilchins, Paritosh Bansal, Martin Howell and Prudence Crowther)