Dollar Tree, a discount retailer known for selling everything for $1, said Monday it plans to buy Matthews-based Family Dollar for $8.5 billion, weeks after an activist investor started pushing the company to sell itself.
Virginia-based Dollar Tree said it intends to keep the Family Dollar name on many of its stores. The combined firm will operate more than 13,000 stores with annual sales of $18 billion, vaulting it past Dollar General to become the nation’s largest dollar store retailer.
The sale heads off a potentially long and ugly fight between Family Dollar and Carl Icahn, the billionaire investor who had campaigned to put Family Dollar up for sale. Icahn took his fight public in early June, demanding that Family Dollar sell itself and get rid of CEO Howard Levine because the company had been unable to catch up with more profitable rivals.
Family Dollar has been trying to close that performance gap for months, announcing plans to close 370 under-performing stores, lay off more than 100 people at its Matthews headquarters, and start selling beer and wine nationwide. The company also shuffled its executive ranks, with the unexpected departure of President Mike Bloom in January.
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As pressure for a sale mounted, executives said they believed Family Dollar could turn itself around on its own. But in the end, a sale proved unavoidable.
The deal would net Family Dollar shareholders, including Icahn, a nearly 23 percent premium for their stock from Friday’s closing price of $60.66. Dollar Tree said Levine would stay with the combined company, running Family Dollar and joining Dollar Tree’s board of directors. He would report to Dollar Tree CEO Bob Sasser.
For Charlotte, the deal means the loss of another prominent homegrown retailer and Fortune 500 headquarters. In January, grocer Harris Teeter was acquired by Cincinnati-based Kroger Co.
“We see a huge amount of opportunity working together,” said Sasser, during a conference call with investors. “We think it is a perfect combination, Dollar Tree, Family Dollar, because of the complementary elements of the business.”
Federal regulators and Family Dollar stockholders must approve the deal, which Sasser said could close by January.
The sale surprised many analysts, who had expected the company would either stand alone or be bought by Tennessee-based Dollar General.
“We are surprised, quite frankly, by this morning’s announcement, as we thought any Family Dollar deal would involve Dollar General or private equity,” wrote Anthony Chukumba, of BB&T Capital Markets, in a note to clients.
Some analysts speculated that Dollar General or even Wal-Mart could still make a rival bid for Family Dollar at a higher price than Dollar Tree’s cash and stock bid of $74.50 per share. Credit Suisse analysts sent a note to investors Monday that said a bid from Dollar General could push Family Dollar’s price to $80 a share.
Icahn said he’s happy with the Dollar Tree deal – but said he hopes it will flush out a higher bidder.
“While we continue to believe there are a handful of potential buyers who could realize greater synergies through a combination with Family Dollar and are hopeful that one or more of them will surface as a result of today’s announcement, we are extremely pleased with Dollar Tree’s intention to acquire Family Dollar,” Icahn said in a statement.
Levine and Nelson Peltz, another prominent investor, have made legally binding pledges to vote for the deal with Dollar Tree, according to securities filings. Together, they control almost 16 percent of the company’s stock. Icahn had not made such a pledge by late Monday.
Levine, whose father founded Family Dollar in 1959, said the deal comes after months of exploring alternatives for Family Dollar. He said during a conference call that the company had considered “a number of potential partners” before settling on the deal with Dollar Tree.
Very different dollar stores
Dollar Tree executives said they expect to save $300 million annually by combining the two businesses, finding efficiencies in areas such as purchasing and distribution. To hit that goal, they’ll have to bring together two companies built on different premises, with different customer bases.
Dollar Tree prices all goods at $1 or less. About half the company’s sales are discretionary, “fun” goods, such as toys and seasonal decorations. And Dollar Tree has a stronger presence in suburban centers.
Family Dollar, on the other hand, sells most of its goods for prices ranging from $1 to $10. About 13 percent of goods sell for $1 or less. Family Dollar stores are concentrated in urban and rural areas, and the company sells mostly consumer staples, with discretionary goods an increasingly less important part of its business. Family Dollar describes its core customer as a single, female head-of-household making less than $40,000 a year.
Sasser emphasized that he expects both companies to retain their pricing strategies and identities.
“At Dollar Tree, everything is still $1. Family Dollar stores will continue to operate under multiple price points,” he told investors. “The concepts are complementary.”
But he said the combined company will examine individual store locations and likely switch some Family Dollar stores to Dollar Tree stores, or vice versa.
“In the immediate future, there is probably some opportunity to re-banner some of our stores,” Sasser said. “Our initial testing on this shows that there is some significant value in being able to put the right banner in the right place.”
Scot Ciccarelli of RBC Capital Markets wrote in a note to investors that he doesn’t see “a ton of strategic synergies” as long as Dollar Tree and Family Dollar operate as largely separate entities. The one-time cost of combining the companies is expected to be about $300 million.
Sasser told investors that it’s still too early to specify exactly where all the cost savings will come from, beyond broad outlines of areas such as logistics.
“There’s a lot more work to be done,” he said.
Fast deal, old hands
The deal came together quickly, with the possibility of a sale first surfacing last month. That’s when Icahn disclosed that he had become the largest individual shareholder of Family Dollar, with 9.4 percent of the stock.
In a private meeting and public letters, Icahn told Levine that he wanted the company sold immediately. Icahn said he was ready to go to shareholders for a vote to fire the company’s entire board of directors if a sale did not take place.
About seven weeks after his first demands, Icahn has gotten his way – up to a point. He wanted to see a merger with Dollar General – not Dollar Tree – and Icahn also said he wanted Levine removed.
Icahn and Peltz, the two major activist investors, have been making plays on companies for a long time. They first rose to prominence in the 1980s by doing hostile takeovers of companies such as National Can and TWA financed with “junk bonds.”
Dollar Tree, based in Chesapeake, Va., said stockholders of Family Dollar Stores will receive $59.60 in cash for every share they own. They will also receive $14.90 worth of Dollar Tree shares – the current price of one share of Dollar Tree stock. When the deal is complete, Family Dollar shareholders will own about 13 to 15 percent of the new, combined Dollar Tree, executives said.
The deal is being financed through a combination of $569 million worth of cash on hand, a $5.4 billion term loan, and up to $2.8 billion worth of unsecured bonds, according to a presentation to investors. JPMorgan Chase has committed to financing the deal.
Family Dollar shares closed Monday at $75.74, up nearly 25 percent. Staff writer Linly Lin contributed