Family Dollar Stores Inc. surged the most in more than 30 years in New York trading after investor Nelson Peltz offered to buy the retailer for as much as $7.6 billion, spurring speculation other suitors will follow.
Peltz’s New York-based Trian Fund Management LP is proposing a bid of $55 to $60 a share, according to a regulatory filing, or up to 36 percent more than yesterday’s closing price. The stock rose as much as 27 percent today.
Family Dollar, led by Chief Executive Officer Howard Levine, is selling more groceries and renovating stores to attract customers. The second-biggest dollar chain in the U.S. may draw private equity bids now that Trian has made an offer, according to analysts at Sanford C. Bernstein & Co., Nomura Securities International Inc. and JPMorgan Chase & Co.
“This price is not unreasonable given the potential for operational improvements,” Charles Grom, a JPMorgan analyst in New York, wrote today in a note to clients. He rates the shares “overweight.” “It’s feasible that another private equity firm could enter into the mix.”
Family Dollar climbed $9.29, or 21 percent, to $53.25 at 4 p.m. in New York Stock Exchange composite trading. The increase was the biggest since 1980, the earliest available data tracked by Bloomberg. The company first sold shares in 1970.
Trian said yesterday that it contacted Levine, who is 52 and one of Family Dollar’s largest shareholders, to give him the opportunity to participate as an investor. Family Dollar said yesterday that it will review Trian’s proposal with help from financial adviser Morgan Stanley and Cleary Gottlieb Steen & Hamilton LLP, its legal counsel. Josh Braverman, a Family Dollar spokesman, declined to comment further. Trian had no comment beyond the filing, said Carrie Bloom, a spokeswoman for the hedge fund.
Family Dollar, started as a single store in 1959 by Levine’s father Leon, may fight a takeover and accelerate stock buybacks and cost cuts to remain independent, according to Mark Miller, an analyst at William Blair & Co. in Chicago.
“Family Dollar has a paternalistic culture that we believe would be anachronistic to a leveraged buyout,” Miller wrote today in a note to clients. He rates the shares as “market perform” and said the likelihood of a Trian takeover is “low,” citing a lack of financing and an unspecific purchase price.
“Given that Trian has not exhibited the debt, much less the equity component to finance a $7 billion LBO, I am more than skeptical,” said Robert Chapman, founder of hedge fund Chapman Capital in Manhattan Beach, California. He said he sold Family Dollar shares short in after-hours trading yesterday at an average of $57 apiece. In a short sale, traders sell borrowed stock, betting they will be able to buy it back later at a lower price, profiting from the difference.
“Peltz may be looking to recover enormous lost capital gains since Family Dollar reported decelerating same-store sales,” Chapman said.
Before today, Family Dollar had tumbled 12 percent this year, including a drop of 8.8 percent Jan. 5 when it said growth of comparable-store sales had slowed to about 4 percent in December. For the year through August, it projected sales by stores open at least 13 months would rise 5 percent to 7 percent, compared with gains of at least 6.1 percent in the three most recently reported quarters.
At $60 a share, the Peltz offer values Family Dollar, including net debt, at about 10 times the last 12 months’ earnings before interest, taxes, depreciation and amortization. That compares with a median of 8 times Ebitda in seven earlier U.S. takeovers of discount retailers since 1997.
Dollar General History
In the biggest deal in the sector, KKR & Co. paid 16 times trailing Ebitda for Dollar General Corp. in 2007.
Trian took a stake in Family Dollar last year and urged the Matthews, North Carolina-based retailer to boost sales growth.
Levine has since accelerated the opening and remodeling of stores. Family Dollar also has added more groceries and other consumables to grab shoppers from Wal-Mart Stores Inc. and other rivals competing for consumers pinched by high unemployment.
Family Dollar, which operates more than 6,800 stores, increased sales at outlets open at least 13 months by 6.9 percent in the quarter ended Nov. 27. By the same measure, larger Dollar General boosted sales by 4.2 percent in the three months ending Oct. 29.
Private equity firms have shown an appetite for low-cost retailers, which benefited during the recession as consumers looked for deals. KKR took Dollar General public in 2009.
Trian, which is headed by Peltz, Peter May and Edward Garden, is one of Family Dollar’s largest shareholders, with a stake of about 8 percent, according to the filing.
Peltz, 68, is known for pushing companies such as Wendy’s and Arby’s fast-food chains to increase value by cutting costs or merging with rivals. Trian’s investments include Wendy’s/Arby’s Group Inc. and Legg Mason Inc., the Baltimore-based asset manager.