Dollar Tree's Acquisition of Family Dollar is Put Under the Microscope By Analysts

Dollar Tree

has entered into a definitive agreement to buy Family Dollar

for $74.50 on Monday morning. MKM Partners expects the deal to close early next year. This wasn't very well received by some analysts; however Deutsche Bank was willing to reiterate their buy recommendation in light of the deal. Deutsche Bank analysts, Paul Trussell and Matt Siler offer a price target of $60/per share. Trussell and Siler state, “With DLTR doubling its top-line and positioning itself for 20% EPS growth the next few years, we're surprised at yesterday's lukewarm stock reaction. Buy.” On the Monday trading session investors bid Dollar Tree to $60 per share, but eventually the optimism faded and speculators started exiting the trade. By Tuesday's trading session, Dollar Tree fell by more than $5 (presently Dollar Tree is trading at $54.83), whereas Family Dollar is trading at $75.24. FBR & Co analyst, Dutch Fox states in a note: “We view the longer-term success of this potential merger as a question of risk and reward, and we are unconvinced that shareholders are being properly rewarded for the risk that the company is taking on by merging with Family Dollar. Family Dollar should not be viewed in a vacuum and should be viewed against the backdrop of maintaining the status quo (steady sales growth and aggressive share repurchases), which could generate an 18.5% EPS CAGR.” In return for a slightly higher growth rate, the company is taking on unnecessary risk, which is a point that other analysts at different firms agree upon. Analysts at BMO Capital cut their

from outperform to market perform, and even lowered their price target from $69.00 to $59.00. MKM Partners goes onto explain that things over at Dollar General

aren't too bad: “While some investors may be disappointed Dollar General isn't buying Family Dollar, given the potential synergies, and may be concerned about Family Dollar emerging as a stronger competitor to DG under Dollar Tree's wing, we don't think the basic industry dynamic has changed that much, and we continue to like Dollar General's prospects.” The caution from analysts trumps the merits of the Family Dollar acquisition. Dollar General is currently up by 1.1 percent on Tuesday's trading session. Whereas Family Dollar is down by 1.04 percent, and Dollar Tree is down by .46 percent on Tuesday's trading session.

Based on analyst sentiment a trend is starting to emerge in which Dollar General may be the better risk to reward investment/trade.