You’d think that Kohlberg, Kravis Roberts & Co. L.P.’s proposed $7.3 billion acquisition of Dollar General Corp.—the second largest leveraged-buyout in retail since 2004—would have a potentially huge impact on strip center REITs, especially since such deals often result in large-scale store closings.

But, even though the deep discounter operates 8,260 stores, no major retail REIT has very much exposure. Dollar General does not appear in JP Morgan’s 2006 Tenancy Handbook—which documents every retailer that accounts for 1 percent or more of any REIT’s annualized base rents.

John Gabriel, a retail analyst with Morningstar, says Dollar General’s portfolio consists largely of stores of 6,000 to 8,000 square feet in small strip centers in rural markets—not the kind of real estate typically owned by the REITs.

“We’re talking about locations tucked away in neighborhoods with low rents,” Gabriel says. “We’re not talking about urban, high-traffic areas.”

After opening more than 700 stores in both 2004 and 2005 and 600 in 2006, the company announced late last year that it was slowing its pace to 300 openings in 2007 and 400 in 2008. Meanwhile, it announced 400 closings—a number analysts think will increase after the deal closes.

Gabriel says the pace of closings is likely to rise under KKR. “We expect it to double at least,” Gabriel says.

About 150 stores have already been shut and another 130 are closing during the first quarter. The remaining 120 will be shut during the balance of the year.

“We believe that in order to successfully IPO Dollar General, the company’s new owner will have to position it as a compelling real estate growth story,” wrote analyst Michael Exstein from Credit Suisse. “As such, it is very likely that additional store closures could be on the horizon.”

What does the Dollar General deal say about the prospects for more retail take-outs—deals that might hit the mainstream retail real estate market?

Clearly, private equity investors see value in the sector. The $22-per-share offer from KKR represents a 31 percent premium over the $16.78 per share that Dollar General’s stock closed on Friday, Mar. 9. The stock has been below its 52-week high of $18.04 reached last March all year bottoming at $12.10 per share last August, just before it initiated its turnaround strategy.

The price works out to 27 times Dollar General’s estimated 2008 earnings and 10.9 times its last twelve months EBITDA. (And Dollar General leases all of its space, so it’s not a real estate play.) These multiples exceed those paid for Petco, Michael’s, Burlington Coat Factory and other recent deals. In contrast, the average multiples on Petco, Michael’s, Yankee Candle, Sports Authority, Burlington Coat Factory, Linens ‘n Things and Toys “R” Us were 8.7 times the last twelve months EBITDA, according to Credit Suisse.

According to analyst Stacy Turnof of Merrill Lynch, that indicates private equity investors are still very bullish on the retail sector. Specifically, she points to Family Dollar as a possible takeover target within the dollar store segment. More broadly, Exstein points to BJ’s Wholesale Club and Saks Inc. as other potential targets.

-- David Bodamer