Family Dollar and Dollar General Merger Likely, According to Jefferies

Family Dollar FDO and Dollar General DG are moving higher Monday morning following Carl Icahn’s 9.39 percent stake in Family Dollar. In his filing, Icahn said he plans to consider strategic alternatives for Family Dollar. Although management teams have pushed against a merger in the past, Jefferies upgraded Family Dollar and Dollar General to buy on an expected deal.

Analyst Daniel Binder writes, “We think synergies could be in the range of $950 million- 1.2billion. This would put EPS for DG at about $5.50-6.00 versus our current estimates of $3.51 for this year.” The note continues, “Simply put, the industry has matured, there are clear performance gaps between the number one and two players, we think the pace of capacity increases are out of balance, new competition is coming and we see potential for large synergies.”

Related: Why Are Dollar Store Stocks Rallying?

Going into more detail, Binder states, “In a combination of DG and FDO, we assume 2,000 subpar FDO stores would be closed and $600-650 million of synergies could be achieved through efficiencies in purchasing, supply chain, advertising, overhead and SG&A. If we then picked up another $350-450 million of EBIT from enhanced profitability on the remaining FDO stores (assuming DG management could get FDO sales and profit levels per sq. ft. up closer to DG levels), we could see $950 million to $1.2 billion in deal synergies.”

Family Dollar’s $79 month price target is based on on 11 times EV/EBITDA multiple. Retail deals over the past two years have been done for 8.5 times to 12 times EBITDA.

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