The benefits from its pending purchase of Matthews-based Family Dollar aren’t certain, Dollar Tree said Friday, and it’s possible that the merger could cause “key employees” to lose their jobs.
In a securities filing, Virginia-based Dollar Tree said the Federal Trade Commission has identified 250 stores that will be sold as a result of its $8.5 billion deal, which the company has said could close by April 27.
Dollar Tree also laid out risks associated with the merger, which it said will be a drag on its earnings for the first year after the deal is complete, and that could cause its stock price to drop.
Taylor Labarr, an analyst at Stiefel who recently downgraded Dollar Tree to a “hold” rating, called the pending merger risky but said he expects the combined company will be successful.
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“They’re integrating a company that has more employees, more stores and more distribution centers than Dollar Tree itself, and that is a complex task,” Labarr said. “There will be potential unexpected costs and potential delays or unexpected setbacks. I don’t know what they’re going to be, but I think that’s par for the course.”
Here are some of the risks Dollar Tree discussed:
▪ Family Dollar shareholder lawsuits could prevent or delay the merger, Dollar Tree said.
▪ Dollar Tree’s “substantial indebtedness” could “materially and adversely affect” its financial position by requiring that a bigger portion of its cash be directed to debt payments rather than capital expenditures and acquisitions.
Dollar Tree said as of Jan. 31, its consolidated debt totaled $757 million. After the merger, debt is expected to rise to $8.5 billion, and availability under its revolving credit facility will be about $1.3 billion.
▪ Combining the two companies may be “more difficult, costly or time consuming than expected” and the anticipated benefits merger may not be realized, Dollar Tree said, citing the challenges Family Dollar has been recently experiencing as a stand-alone company.
“We expect that the company will soon outline a detailed game plan on how it will look to integrate the two dollar chains, and more important, improve the sales productivity and profitability of Family Dollar,” Charles Grom, an analyst at Sterne Agee, wrote in a research note to clients Friday.
Dollar Tree said it expects about $300 million in annual cost savings by the end of the third year after the deal closes, and that the company will incur $300 million in one-time costs to achieve the savings.
In its Friday filing, Dollar Tree also said its segment of the retail industry is “highly competitive,” and it expects competition to increase in the future. Rival Dollar General, the country’s biggest discount retailer, lowered its full-year growth forecast this week in anticipation of its ramped-up spending on store openings before the Dollar Tree deal heats up competition.
When the Dollar Tree-Family Dollar deal closes, the merged company will have a combined 13,000 stores in 48 states and the District of Columbia. Dollar General operates 11,789 stores in 40 states.
Dollar Tree said that 250 stores to be sold represents about $34 million of operating income and that the FTC’s review of the remaining stores will be complete in the near future. Neither company has specified how many people at the Matthews headquarters will lose their jobs.