A view of the sign outside the Dollar Tree store in Westminster, Colorado. Discount chain Dollar Tree will buy rival Family Dollar Stores for about $8.5bn, in a surprise deal that will help it fend off increasing competition from big-box retailers such as Wal-Mart Stores.
Reuters
Discount chain Dollar Tree will buy rival Family Dollar Stores for about $8.5bn, in a surprise deal that will help it fend off increasing competition from big-box retailers such as Wal-Mart Stores.
Dollar stores have struggled in a weak US economy as Wal-Mart and other large retail chain chase penny-pinching consumers by offering more items priced at $1 or less.
The deal will give Dollar Tree more than 13,000 stores across the US and Canada, vaulting the company ahead of Dollar General Corp to become North America’s biggest discount retailer.
Family Dollar’s sale is a big win for activist investor Carl Icahn, who has been urging the company to sell itself.
The company’s shares rose to $74.35 in early trading. Dollar Tree’s cash and stock offer valued Family Dollar at $74.50 per share. Dollar Tree shares were up 6.9% at $57.84.
Based on Reuters’ calculations, Icahn - who wanted Family Dollar to sell itself to Dollar General – stands to make a profit of about $200mn based on the price at which he bought his 9.4% stake in the company.
Family Dollar CEO Howard Levine and Trian Fund Management LP, collective owners of about 16% of Family Dollar, support the deal, the companies said.
“Trian strongly believe that the combination with Dollar Tree represents the best path forward for Family Dollar ... ,” Trian spokeswoman Anne Tarbell said in an email.
Family Dollar has slashed prices, cut jobs and shut hundreds of stores as it seeks to reverse declining sales and earnings. It also implemented price cuts on 1,000 basic items.
“With a new sheriff in town, Family Dollar will be a much sharper competitor going forward, creating margin pressure in the process,” Sterne Agee & Leach analysts wrote in a note.
Dollar Tree, whose products cost $1 or less, caters to the middle class. Family Dollar also sells many items priced at $1 or less, but stocks higher-priced items as well. “This acquisition will extend our reach to lower-income customers and strengthen and diversify our store footprint,” Dollar Tree CEO Bob Sasser said. Dollar Tree offered $59.60 in cash and the rest in stock for each Family Dollar share, a premium of about 23% over Family Dollar’s close on Friday.
The transaction has an enterprise value of about $9.2bn, Dollar Tree said.
Family Dollar had about 114mn shares outstanding as of July 5 and long-term debt of about $484.2mn as of May 31.
Dollar Tree said it expects to save about $300mn annually by 2018, three years after the deal is likely to close. Dollar Tree said it had secured bridge financing from JP Morgan Chase Bank that, along with existing cash and bonds, would be used to finance the deal.
JP Morgan Securities is financial adviser to Dollar Tree. Morgan Stanley & Co is advising Family Dollar. Dollar General’s shares were down 1.5% at $54.73.