10/11/2011 09:04 EDT | Updated 12/11/2011 05:12 EST

CPP investment board takes stake in U.S. dollar stores in deal worth US$1.6B

TORONTO - The Canada Pension Plan Investment Board plans to scoop up a bigger stake in the U.S. dollar store market with a US$1.6 billion joint-venture deal to acquire 99 cent Only Stores (NYSE:NDN).

The investment wing of the Canada Pension Plan says it has agreed to team up with New York-based merchant bank Ares Management to buy the chain, which has 289 stores in California, Texas, Arizona and Nevada.

The group will pay $22 per share in cash for New York Stock Exchange-listed 99 cent Only Stores, a premium of about 32 per cent to its closing share price on Friday.

The investment board did not say how much of the total price it will be paying, nor the size of the stake it will be taking in 99 cent Only Stores.

If successful, the acquisition would be the Canadian pension fund's second foray into the dollar store market. It invested in Dollar General stores in 2007 and held onto its shares when the company went public in 2009.

CPPIB senior vice-president of private investments André Bourbonnais said the chain has a strong market position and attractive store economics in a growing retail sector.

"This investment is consistent with our strategy of investing alongside strong partners in an asset that we believe is well positioned for the long term and has shown good performance in various economic environments," he said in a statement.

Although the U.S. retail sector has been hard hit by waning demand from recession-battered consumers, discount chains like dollar stores and Walmart tend to be more resilient in times of worsening consumer confidence as value-driven shoppers seek out savings and deals.

The potential new owners plan to expand the network of franchised stores, said Ares, which also owns stakes in Floor and Decor Outlets of America, General Nutrition Centers, Samsonite and Serta and Simmons Bedding Company.

The discount store operator said that a special committee of its board of directors has determined the deal is fair and in the best interest of its shareholders and recommends the takeover be approved.

The deal still requires approval from a majority of the company's shareholders and is subject to customary closing conditions. It is expected to close in the first quarter of 2012.

The CPPIB invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 17 million Canadian contributors and beneficiaries.

In the retail sector, the board tends to focus on real estate holdings, such as shopping malls, where it can turn a profit from retailers that lease out space.