Dollar Tree's agreement to buy Family Dollar Stores in a
cash-and-stock deal valued at about $8.5 billion would create a
new No. 1 in the deep discount retail market.
The deal, announced early Monday, would give the combined
company clout to compete not only with No. 1 dollar-store
chainDollar General (
) but also with big-box discounters such asWal-Mart Stores (
) andTarget (
), which are increasingly targeting bargain shoppers.
"This is a transformational opportunity,"Dollar Tree (
) CEO Bob Sasser said in a statement.
With the buyout ofFamily Dollar Stores (
), he added, Dollar Tree will "become a leading discount retailer
in North America," with more than 13,000 stores in 48 states and
five Canadian provinces, annual sales above $18 billion and more
than 145,000 employees.
It would top both Wal-Mart and Dollar General in store count,
although Wal-Mart's annual revenue of about $478 billion a year
dwarfs both Dollar Tree and Dollar General.
Last week, Wal-Mart ousted its U.S. CEO, Bill Simon, after
several quarters of declining U.S. same-store sales. The world's
No. 1 retailer has struggled in the difficult post-Great
In recent years, Wal-Mart has moved away from its big-box
store model and begun expanding into cities with smaller stores
that increasingly compete with dollar stores.
Now Wal-Mart will find itself competing against a new giant in
the deep discount sector, should the Dollar Tree-Family Dollar
merge sail through with no problems.
Under the terms of the deal, Family Dollar shareholders would
receive $74.50 per share -- $59.60 in cash and $14.90 equivalent
in Dollar Tree shares.
The purchase is expected to close in early 2015.
Shareholders are the big winners in this merger, Deutsche Bank
analyst Paul Trussell told IBD.
"Family Dollar has been struggling with operations.
Shareholders not only get paid handsomely right away but get to
participate in upside of this deal" long term, Trussell said.
Operational prowess is not a problem at Dollar Tree, he added.
"The Dollar Tree management team has done a good job executing.
They are strong in the merchant market and good at managing
As a result, Trussell said, "the combined company is
definitely going to be a formidable competitor not just to Dollar
General, but it helps them compete with some of the bigger
companies like Wal-Mart."
In a conference call with analysts, Dollar Tree outlined
synergies in purchasing and distribution that could save the
combined company $300 million a year within three years. It
expects the purchase to be accretive to earnings within a
"The $300 million in synergies they outlined are very
achievable," Trussell said.
He has a buy rating on Dollar Tree with a 60 price target.
Trussell rates Family Dollar a hold with a 59 target and Dollar
General a hold with a 60 target.
The agreement came after Family Dollar was pressured by
activist investors Carl Icahn and Nelson Peltz, who own large
blocks of the company's shares, to merge with another
Icahn has accumulated a nearly 9.4% stake in Family Dollar,
according to a recent regulatory filing. He had publicly urged a
Family Dollar merger with Dollar General. Peltz disclosed a large
position in Family Dollar in 2010 and later landed one of his
partners on the company's board.
However, Family Dollar later adopted a shareholder-rights plan
-- aka a poison pill -- that would limit investors from acquiring
more than 10% of the company and also deter hostile
In a statement on his website lauding the purchase
announcement, Icahn indicated that additional buyers might bid
shares up further.
"While we continue to believe there are a handful of potential
buyers who could realize greater synergies through a combination
with Family Dollar and are hopeful that one or more of them will
surface as a result of today's announcement, we are extremely
pleased with Dollar Tree's intention to acquire Family Dollar,"
In another indication more bidders might join the fray, Family
Dollar shares jumped 25% to 75.74, closing above the proposed
purchase price in Monday trading on the
stock market today
. Dollar Tree rose as much as 10% in early Monday trading but
retreated to a 1.2% gain by close. Dollar General closed down
A Negative For Dollar General
Meanwhile, Sterne Agee analyst Charles Grom sees a pairing
with Family Dollar as a "net negative" for Dollar General.
"First and foremost," he wrote in a report Monday, "Dollar
General has clearly benefited from Family Dollar's struggles over
the past decade." That benefit could quickly end if Dollar Tree
were to take Family Dollar under its wing, Grom said.
He also noted that Dollar General CEO Rick Dreiling is
expected to step down soon, "and the future for Dollar General is
a bit more cloudy at this juncture."
"With a new sheriff in town" in Dollar Tree, "Family Dollar
will be a much sharper competitor going forward," Grom said.
The deal was not all that surprising to Grom, who said that
Dollar Tree "has historically been acquisitive."
Dollar Tree intends to finance the acquisition through a
combination of cash on hand, bank debt and bonds.
Few details of how the post-merger company would operate were
provided initially, but Dollar Tree indicated that Family Dollar
would continue to operate as a separate unit.
Family Dollar CEO Howard Levine would stay with the company
and report directly to Sasser.