Dollar Tree Readies for Family Dollar Buyout

Dollar Tree Inc. DLTR has strategically agreed to acquire its rival Family Dollar Stores Inc. FDO, in a cash and stock transaction valued at approximately $9.2 billion. The giant that will rise will be strong enough to single-handedly counter competition from retail bellwethers such as Wal-Mart Stores Inc. WMT and Dollar General Corporation DG in the dollar-discount store segment. 

The deal, which is expected to conclude by early 2015, involves payment of $74.50 per share —$59.60 in cash and $14.90 in stock — to Family Dollar, an astounding premium of 22.8% over its closing price as of Jul 25. Dollar Tree plans to finance the transaction through cash in hand, bank debt and bonds.

The combined chain, with the ability of generating sales of over $18 billion, will be in a better position to reach out more value seeking consumers through its vast network of more than 13,000 stores spanning 48 states and five Canadian Provinces. The buyout, which will facilitate Dollar Tree to emerge as a leading discount retailer in North America, will also assist in providing customers with products at a fixed price ($1 or less) under its banner and multi-price point under Family Dollar.

The acquisition will enhance the buying power of the pair, providing better negotiating terms against suppliers. The combined company will be able to offer broader and multiple assortments at more compelling prices. Moreover, the transaction will help in achieving operational and distribution efficiencies as well as cost synergies.

Dollar Store anticipates savings of $300 million in annual costs by the end of the third year, after the deal is closed. Post acquisition, the companies will be able to tap new markets, enhance market share in existing ones, extend the sales channel and generate significant free cash flow to increase store count and repay debt.

The deal could bring some breather Family Dollar, which has been in troubled waters for some time now. The tepid economic recovery and heightened competition from other big brick-and-mortar retailers along with online giants has affected its profitability. In the recently concluded quarter, the company saw its earnings per share declining 19% year over year.

To bring itself back on the growth trajectory, Family Dollar announced a slew of measures. Management lowered prices of approximately 1,000 basic items and disclosed plans to invest $50 million annually to add value-based products, optimize the cost structure by lowering headcount, close about 370 underperforming outlets and be more rationale on new store opening to reap higher return on investment.

Billionaire activist investor Carl Icahn holding a 9.4% stake in Matthews, NC-based Family Dollar, had long been pushing hard for the sale of the company. The recent announcement gave shape to his ambitious plan, although he had anticipated that Dollar General would emerge as the potential bidder. Even after the announcement of the accord between Dollar Tree and Family Dollar, market experts believe that a bidding war could surface with Dollar General or other big retailers might try their luck.

Following the buyout news, shares of Family Dollar soared 24.9% to close at $75.74 yesterday. But it had little impact on Dollar Tree, which saw its shares rising 1.2% to close at $54.87. On the other hand, their rivals Dollar General and Wal-Mart witnessed a decline of 0.1% and 0.3% to $55.56 and $75.71, respectively, in yesterday's trading session.