Family Dollar deal could close this month, bring big changes

For Matthews-based Family Dollar Stores, May could be one of the biggest months in the discount retailer’s 56-year history.

Chesapeake, Va.-based Dollar Tree has said it expects its $8.5 billion purchase of Family Dollar to close this month, capping a 10-month takeover drama. But the close has been delayed before, and neither company would comment this week.

After Family Dollar shareholders approved the deal in January, the biggest remaining hurdle became regulatory approval from the Federal Trade Commission. Experts say the company will need the sale of stores for competitive purposes to be determined before it gets the final nod.

“We’re at the mercy of a government organization,” said Matt Nemer, a Wells Fargo analyst who covers Family Dollar. “It’s a pretty complex analysis.”

After the deal’s close comes the complicated task of merging two companies with different business models: Family Dollar carries more national brands and items that cost several dollars, while Dollar Tree sells everything for $1 or less.

The transition period for the companies will mean merging cultures, connecting systems and cutting expenses, which could include layoffs for some of the 1,300 workers at Family Dollar’s corporate headquarters in Matthews. Dollar Tree has said, though, it will maintain Family Dollar’s headquarters and keep the chain’s name.

Dollar Tree has said it plans to reduce annual expenses by $300 million in the deal, but it will take three years to hit that mark. Analysts say combining the companies will almost certainly bring the loss of some corporate jobs. But cuts likely would have been more severe if a rival bid by Dollar General for Family Dollar had been successful.

“If Dollar General had gotten them, the entire headquarters would probably be empty in two years,” Edward Jones analyst Brian Yarbrough said. “(The Dollar Tree deal is) a much better scenario ... but I think if you went into this saying there will be no job cuts, that’s probably not realistic.”

Representatives from Family Dollar, Dollar Tree and the FTC declined to comment.

Jobs in Matthews

Analysts say back-office jobs in areas including human resources, accounting and finance could be cut if there are redundancies with Dollar Tree once the companies combine.

Amid the uncertainty of the takeover fight, CEO Howard Levine in January said the company had lost about 100 workers in Matthews – though it’s unclear how many left because of retirement or other reasons.

One former Family Dollar corporate employee said that, for the most part, the “urgent exodus” from the headquarters is over.

Another former corporate employee said Family Dollar has offered retention bonuses in an effort to keep key employees, though other Matthews workers still anticipate layoffs. The two former employees asked not to be named to protect business relationships.

Information technology is one department that probably won’t see cuts in the short term because the two chains run on too “many different” hardware and software systems, said Nemer, the Wells analyst.

Family Dollar’s merchandising and store operations teams, the largest part of its corporate employment, will also remain separate from Dollar Tree’s, given the chains’ different business models, Levine said when Family Dollar shareholders approved the merger in January.

Levine acknowledged there will be some overlap in the executive ranks, but said he expects most Family Dollar employees will continue to have “significant career paths.”

Store divestitures

The combined Dollar Tree company will have about $20 billion in revenue and 13,000 stores, making it the world’s largest discount chain.

The FTC reviews all deals that are valued at more than $76.3 million. Regulators look at the location and sales of each store and then will require a certain number of divestitures to preserve market competition, said David Balto, a Washington-based antitrust attorney at the David Balto Law Offices who has also worked at the FTC.

In a recent securities filing, Dollar Tree said it expects the FTC will require it to sell 340 stores, mostly Family Dollar locations, representing about $47.4 million of operating income.

Deals with buyers of divested stores have to be in place before the deal is approved. Buyers must submit business plans to the FTC on how they’ll use the stores’ assets, Balto said, and the transition to a new owner must be quick so that the stores aren’t empty for long periods of time.

“Retail assets are tremendously fragile and if a store goes dark it will lose a great deal of its business,” Balto said.

The new owner isn’t required to keep the former employees of the divested store, Balto said, though it’s cheaper to keep them than lay off workers and rehire more.

‘Praying for them’

Dollar Tree might take other steps to cut expenses and improve performance.

The larger company can negotiate cost savings with vendors because their orders will be bigger. It can also save by making distribution more efficient, which could result in lower transportation costs.

Dollar Tree could also turn under-performing Family Dollar stores in suburban areas into Dollar Trees, Nemer said. “Dollar Tree is really a superior store format,” Nemer said. “The single-dollar price point attracts a broader customer base.”

Meanwhile, one Family Dollar store near uptown Charlotte was still bustling recently, with shoppers flowing in to stock up on everything from laundry detergent to breakfast cereal to motor oil.

The clerk, who said she has been with the company four years and has been closely following the takeover drama, greeted customers familiarly, remembering one man’s usual cigarette preference as he approached the counter. She said she’s not worried about her job because the store is always busy, but is concerned for those at under-performing locations.

“I’m praying for them,” she said.

This story was originally published May 3, 2015 at 2:00 PM with the headline "Family Dollar deal could close this month, bring big changes."