Family Dollar adopts ‘poison pill’ after Icahn takes stake

Matthews-based Family Dollar has adopted a “poison pill” that could repel any potential hostile takeover attempt by activist investor Carl Icahn. But some analysts say a sale, merger or executive shakeup at the company looks increasingly likely.

Icahn said Friday that he has bought 9.4 percent of the company. That means that more than 22 percent of the company’s shares are controlled by activist investors, including John Paulson’s hedge fund and Nelson Peltz, who tried to buy the company in 2011.

“With multiple activists holding big positions, we could see (Family Dollar) respond to shareholder pressure by changing management and board members or putting the company up for sale,” wrote Jefferies analyst Daniel Binder in a note to clients on Monday. He upgraded the stock to “buy” based on the potential for a merger with Dollar General, a larger rival Family Dollar has lagged in sales and revenue growth.

Icahn said he wants to push for changes in strategy at the discount retailer. Icahn also said he might push for a seat on the board of directors, or for the company to explore “strategic alternatives” – which often means a sale, merger or takeover of a company.

But while Family Dollar said it’s open to talks with Icahn, the poison pill could cast doubt on that prospect. The provision could kick in if anyone buys more than 10 percent of Family Dollar’s stock, triggering the issuance of new stock and diluting everyone’s holdings, making them less valuable.

In a statement Monday, Family Dollar said the plan is “not designed to prevent an offer to acquire the Company, but rather to allow the Board adequate time to consider any and all alternatives.”

Icahn is a longtime corporate activist – corporate raider to some – with a $24 billion net worth who has taken on companies from airline TWA to Apple. On Monday, he told Reuters that the poison pill “puts a damper” on the prospect of amiable discussions with Family Dollar.

The news of Icahn’s interest comes at a challenging time for discount retailers. Family Dollar is facing increasing competition from Wal-Mart, which is developing small-store formats, and the economic recovery means more consumers have the means to upgrade to other retailers.

Tennessee-based Dollar General, the Matthews retailer’s larger rival, reported $17.5 billion worth of sales in 2013, versus $10.4 billion at Family Dollar. Both have been opening stores at a rapid pace in recent years: Dollar General operates more than 11,000 stores, while Family Dollar has about 8,100.

Family Dollar has also struggled with falling profits and revenue, while Dollar General has seen both grow. Top executives at Family Dollar said in April that their strategy of frequent sales and discounts wasn’t working, and that the economy was still hurting the company. The retailer laid off 135 workers at its Matthews headquarters, announced plans to close 370 underperforming stores and slashed prices on 1,000 items to lure shoppers back.

Binder said a combination of Family Dollar and Dollar General could yield “enormous synergies” of as much as $1.2 billion a year.

“There are clear performance gaps between the number one and two players,” Binder wrote. In addition to cost savings, he said the combination could slow rapid store growth and cut back on excess capacity.

Analysts at Sterne Agee said Monday that it’s unlikely Family Dollar will remain a public company, while MKM Partners analysts said that a sale “will figure prominently” in Icahn’s deliberations.

Not all analysts saw a sale of the company as likely. Wayne Hood of BMO Capital Markets said the surge in Family Dollar’s stock price since Icahn’s move makes a deal “less attractive.” Family Dollar is already trading near the level at which dollar store stocks traded in past deals, meaning anyone who wants to acquire the company will likely have to pay a hefty premium.

Hood also cited “difficulties overcoming leadership of the merged companies, merging two different cultures, near-term risks to Dollar General's investment-grade rating, and anti-trust review” as significant obstacles to a merger.

Howard Levine, CEO and son of Family Dollar founder Leon Levine, remains the company’s largest individual shareholder, with 8.2 percent of shares outstanding. That’s worth about $639 million at the stock’s current levels.

Family Dollar used a similar poison pill in 2011 to fend off Peltz, an activist investor who made an unsolicited bid to acquire the company. Peltz eventually won a seat on the board of directors for one of his associates, Ed Garden.

According to securities filings, the board of directors voted to adopt the poison pill for one year on Sunday. Garden was the only member of Family Dollar’s board of directors who voted against the new poison pill, the company said.

Family Dollar’s stock closed up more than 13 percent Monday, at $68.62 a share, as investors reacted to Icahn’s move.