Dollar Tree Bids for Family Dollar to Help Compete With Big Retailers
Updated, 9:10 p.m. |
By many measures, the American economy is improving. But two of the nation’s big deep-discount retailers are betting that a merger will help them compete for the country’s poorest customers.
By many measures, the American economy is improving. But two of the nation’s big deep-discount retailers are betting that a merger will help them compete for the country’s poorest customers.
Dollar Tree’s proposed $8.5 billion takeover of Family Dollar Storeswill form a new giant of the dollar-discount industry, better equipped to take on the market leader, Dollar General — and perhaps more important, Walmart Stores.
At a time when unemployment benefits claims are falling and the stock market is soaring, one might expect stores selling household goods for $1 to fall out of favor. Yet sales have climbed at such retailers in recent years as lower-income Americans continue to seek out bargains.
“People are still under pressure,” Bob Sasser, Dollar Tree’s chief executive, said in a telephone interview. “It’s not like things are easy out there. And by the way, everyone likes to save money.”
By buying Family Dollar, Dollar Tree will expand markedly, to 13,000 stores in 48 states and in Canada, as well as to $18 billion in annual revenue. And Dollar Tree, which sells household supplies and party goods for $1 or less, will gain in its newest acquisition a retailer with a number of (still low-cost) price points and access to poorer markets.
Getting bigger may also help the pair pull together their buying power, negotiating bigger discounts from suppliers while finding ways to cut costs. The two companies expect to save $300 million in annual costs by the third year after closing.
That could prove especially important if Walmart continues to introduce more small-format stores to complement its traditional supercenter locations.
Mr. Sasser played down the prospects of Dollar Tree’s taking on the colossus of American retail.
“We’re staying in the dollar sector,” he said. “We’re still going to be in the value retail sector.”
The deal will still keep alive the Family Dollar brand, begun in Charlotte, N.C., 55 years ago by Leon Levine, the father of Howard Levine, the chief executive.
Under the terms of the deal, Dollar Tree will pay $74.50 for each share of Family Dollar, with $59.60 of that in the form of cash and the remainder in shares of itself. That bid represents a premium of nearly 23 percent to Family Dollar’s closing price on Friday.
Family Dollar was contending with intensifying pressure from activist shareholders to pursue a sale of itself. The billionaire Carl C. Icahn emerged as a noisy gadfly last month when he disclosed owning 9.4 percent of the company’s shares and demanded board seats.
His campaign put him in the same boat as the hedge fund managerNelson Peltz, whose investment firm gained a board seat nearly three years ago after failing to buy out the whole company. As recently as this month, Mr. Peltz said publicly that he was not satisfied with the company’s performance.
But by that point, Family Dollar was already in talks to sell itself to its competitor, according to a person briefed on the talks. The company had begun weighing strategic alternatives, including a possible sale of itself, as far back as last winter. And by March, the company and its advisers had begun sales talks with Dollar Tree, even before Mr. Icahn had begun accumulating shares.
Still, even after the announcement, investors appeared to be wagering that a bidding war would emerge over the company, with Dollar General or another big retailer potentially topping the takeover bid. Shares of Family Dollar closed on Monday at $75.74, above the price of Dollar Tree’s offer.
By the time that Mr. Icahn emerged, analysts and investors had bet that Dollar General, not Dollar Tree, would emerge as a probable bidder. But last month, Dollar General’s chief executive, Rick Dreiling, said that he would step down, damping expectations of a takeover bid.
Still, the leader in the dollar retail sector may be moved to act. Analysts with Sterne Agee wrote in a research note on Monday that the future of Dollar General appeared a bit more cloudy if the deal were to go through.
“Dollar General has clearly benefited from Family Dollar’s struggles over the past decade,” they wrote. “With a new sheriff in town, Family Dollar will be a much sharper competitor going forward.”
Dollar Tree has already assembled a significant amount of support for its current deal. Shareholders representing about 16 percent of Family Dollar’s shares, including Mr. Levine and Mr. Peltz’s firm, have already agreed to back the current takeover bid.
“Trian strongly believes that the combination with Dollar Tree represents the best path forward for Family Dollar and is a great outcome for all of the company’s shareholders,” a representative for the hedge fund, which owns a 7.3 percent stake, said in a statement. “By joining with Dollar Tree, Family Dollar is becoming part of a stronger organization that will drive significant value for shareholders of both companies.”
Mr. Icahn himself appeared to hold out hope that a higher takeover bid would emerge, arguing in a blog post that “a handful of potential buyers” could emerge with superior offers.
Still, he expressed pleasure with Monday’s bid. “This is a big win for all shareholders of Family Dollar,” he added, “and yet another validation of the activist investment philosophy in general.”
Mr. Icahn has reason to be happy. The activist began buying securities in the company in April, paying an average price of $58.20 a share — scoring a 28 percent gain for a three-month investment.
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