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UPDATE: Bank Of America Upgrades Dollar Tree

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Dollar Tree (NASDAQ: DLTR) was upgraded by at least one analyst Monday after its $8.5 billion bid for Family Dollar (NYSE: FDO) appeared to be headed nowhere.

Dollar Tree shares were down 2.1 percent Monday afternoon to $54.44.

Bank of America's Denise Chai said Dollar Tree's apparently failed offer "represented a disappointing change in direction, and we saw limited opportunity" for earnings growth.

Chai upgraded Dollar Tree to Buy with a $71 target. Two weeks earlier, she downgraded the company to Hold based on its acquisition plan.

With Dollar General (NYSE: DG) now the apparent winner in a bidding war, Chai said Dollar Tree "can now go back to being a story of consistency and high returns" without the risk of a big acquisition.

Chai said a counter bid by Dollar Tree is "very unlikely" because the company previously described its bid as a "final offer," and raising it would require further borrowings.

Dollar Tree is entitled to a $300 million termination fee if Family Dollar accepts Dollar General's offer. Chai expects the fee will be used for share buybacks.

Chai noted that synergies expected by Dollar General from its acquisition of Family Dollar are double those predicted by Dollar Tree.

Moreover, borrowings required by Dollar Tree to acquire Family Dollar would reduce its debt rating, requiring five years to recover an investment grade, Chai said. Dollar General's debt is expected to return to investment grade within three years, following an acquisition of Family Dollar.

Latest Ratings for DG

Dec 2018CitigroupMaintainsBuyBuy
Oct 2018UBSMaintainsBuyBuy
Sep 2018BuckinghamInitiates Coverage OnBuy

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Posted-In: Bank of America Denise ChaiAnalyst Color News Upgrades M&A Analyst Ratings


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