The future of Family Dollar Stores as an independent company has been in question for several years. The company is a discount retailer headquartered in Matthews, with 8,200 stores spread across the country. Family Dollar has struggled to satisfy its equity investors, especially as the stock has fallen into the hands of hedge funds and other short-term investors. The company has sought to restructure its stores, reconfigure its product offerings, and find a strategic investor for the business. Up until recently, none of these endeavors had borne enough fruit to keep the wolves at bay.
In June, Carl Icahn stepped into fray, buying a 9.4 percent stake in the company. Mr. Icahn’s message was clear: Sell the company or be prepared for a messy battle for corporate control. At the end of July, Family Dollar agreed to sell the business to Dollar Tree for $74.50 per share in cash and stock. Almost immediately, Mr. Icahn reduced his position in the company and locked in his profit.
The Family Dollar transaction isn’t unusual in any respect. These types of deals are consummated everyday. However, this one is taking place in our state, so I thought it was an opportunity to talk about the theatrical production that underlies mergers and acquisitions. Almost every deal uses the same press release that attempts to soothe the headquarters city of the acquired business, calm the employees, and reassure the customers. The Family Tree/Dollar Tree deal is following the script to the letter.
In order to understand the impetus for the deal, you have to recognize that Family Dollar is engaged in a very difficult business. For starters, retailing is a low-margin business, since it is selling other company’s products. Family Dollar operates in a particularly tough part of the market, discount retail in predominantly poorer rural and urban areas. The company’s customers are the folks who have been losing economic ground for the last thirty years. Moreover, Family Dollar is sandwiched between gigantic retailers such as Wal-Mart and more recent entrants such as Dollar Tree and Dollar General. In order to generate rising profits, the company has to squeeze out fractions of a penny through creative pricing and merchandising and/or cost reductions.
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Out of options
As best as I can tell, Family Dollar ran out of options in deflecting the activist hedge funds and decided they had to give up control of the company. While substantially smaller than Family Dollar, Dollar Tree will be firmly in control of the combined business. As with all acquisitions, their first message is “nothing will change.” In this instance, the management has indicated that it will continue to operate the two chains (known in the industry as “banners”) with small adjustments along the way. On the company’s conference call with research analysts, management parried almost every question about potential changes with the comment that it is “too early to tell.” Management and the analysts both know that everything is about to change.
Aside from being larger, Family Dollar has much lower operating margins than Dollar Tree. The companies operate different business models in different type of locations. In addition, Dollar Tree is taking on $8.4 billion in debt to pay for the deal. Unless Dollar Tree’s management acts decisively, Dollar Tree doesn’t have much time before Wall Street analysts and hedge funds start asking Dollar Tree’s management the same tough questions they’ve been asking Family Dollar for the last few years.
Management has indicated that they will derive about $300 million in savings over the next few years. As is typical in these situations, they are only talking about the easy changes such as procurement and distribution. While Dollar Tree will be able to get some price concessions from suppliers and will be able to streamline its logistics, it’s going to take much more painful steps to drive $300 million in savings. However, Dollar Tree’s management doesn’t want to talk about firing people or closing facilities while it’s completing the transaction and dealing with Family Dollar’s management team.
The Levine family, which founded Family Dollar, won’t feel the pain of losing control of the company for long. While they may regret selling the business formed by Leon Levine in 1959, they won’t miss the battle with the hedge funds. They’ll come away with enough cash to continue to be respected and generous patrons of the Charlotte community. You also shouldn’t feel too sorry for the top executives at Family Dollar. They have enough stock and severance agreements to allow them a comfortable landing when they are eventually jettisoned. As with all mergers, it isn’t going to be easy for the rest of the employees who don’t enjoy those perks. Although the Matthews headquarters of Family Dollar may be given some type of regional role in the combined company, Chesapeake, Va., is going to control the top jobs and drive all the changes in the business.
More drama ahead
While Dollar Tree is figuring out how they’ll make the merger work, there’s still a bit of drama to be played out. At present, Family Dollar’s stock is trading as if it’s possible that some other company may step in and offer a higher price. There’s a bit of irony in this development, since many investors had a low opinion of Family Dollar’s prospects until two weeks ago. All of sudden, analysts are speculating about how Family Dollar might be the key asset for Wal-Mart to acquire in order to fend off its competitors, or how Dollar General may snatch away the prize from Dollar Tree. I’m confident that armies of investment bankers are trying to find a company willing to make a higher bid. Meanwhile securities lawyers have filed suit, alleging that Family Dollar is being sold for too little. All these developments are the standard stuff of mergers and acquisitions.
In the end, Dollar Tree will probably walk away with the prize. They’ve already gotten commitments from the Levine family and Trian Fund Group, an activist manager. However, it’s possible that they’ll have to raise the price in order to close the deal. In the end, if Dollar Tree or someone else pays a higher price, it will largely serve the interests of speculators and Wall Street bankers. For the employees and customers of Family Dollar, every additional dollar tacked on to the acquisition price will require more draconian measures to try to make the deal work for Dollar Tree’s creditors and shareholders.
Almost every business eventually runs its course. Some fail. Some are acquired. Although corporate executives and bankers would like us to believe that they can construct a “win-win” situation for their stakeholders, this is seldom the case. Mergers and acquisitions are an inevitable and ugly part of our economic landscape. Family Dollar Stores is just one more example.
Andrew Silton’s Meditations on Money columns can be found twice a month in The N&O’s Work&Money section. He is a retired money manager living in Chapel Hill. He was CIO for the North Carolina Retirement System from 2002-2005. He writes the blog http://meditationonmoneymanagement.blogspot.com/