July 28 (Bloomberg) -- Dollar Tree Inc. agreed to buy Family Dollar Stores Inc. for about $8.5 billion, creating a sprawling discount chain with $18 billion in sales and more locations than any other retailer in the U.S.
Dollar Tree will pay $74.50 a share in cash and stock, 23 percent above Family Dollar’s closing price at the end of last week, according to a statement from the companies today. Including debt, the deal has a value of about $9.2 billion.
The purchase transforms the dollar-store market and fulfills the ambitions of billionaire investors Carl Icahn and Nelson Peltz, who had acquired major stakes in Family Dollar and pushed for a sale. Peltz, head of Trian Fund Management LP, went so far as to make an unsolicited bid for Family Dollar in 2011 in an attempt to attract other suitors. That offer was turned down and no other bidders emerged at the time.
Family Dollar Chief Executive Officer Howard Levine had previously been reluctant to sell the company his father founded. After years of struggling to compete with other discount chains -- including Dollar Tree, Wal-Mart Stores Inc. and current dollar-store market leader Dollar General Corp. -- a deal became harder to resist, said Joseph Feldman, an analyst at Telsey Advisory Group in New York.
“It’s a more natural evolution than anything else,” he said. “Family Dollar has been under some pressure for some time.”
Family Dollar shares rose 25 percent to $75.74, while Dollar Tree’s stock gained 1.2 percent to $54.87. Under the agreement, Dollar Tree will pay $59.60 in cash and $14.90 in stock per share for its Matthews, North Carolina-based rival.
Icahn disclosed last month that he’d acquired 9.4 percent of Family Dollar and urged the company to put itself up for sale “immediately.” Today’s agreement means his stake increased in value by about $150 million over the weekend. Peltz’s Trian owns about 7.3 percent of the company, so that firm’s holdings rose about $115 million in value.
As an activist investor, Icahn has previously pushed for changes at companies such as Apple Inc., Netflix Inc. and Dell Inc. At Family Dollar, the billionaire had been interested in enticing Dollar General to acquire the company, a person familiar with the matter said last month.
Dollar General was offered a chance to bid for Family Dollar and declined the opportunity, according to another person with knowledge of the process. Dollar General could come back to the table depending on how investors react to the deal, though Dollar Tree management isn’t expecting a bidding war, said the person, who asked not to be identified because the discussions were private. Dollar General, based in Goodlettsville, Tennessee, didn’t respond to a request for comment.
Icahn said on his blog today that there were “a handful of potential buyers” that could benefit from a merger with Family Dollar. He said he was “hopeful that one or more of them will surface as a result of today’s announcement.”
After Icahn announced his stake, Family Dollar adopted a shareholder-rights plan that limited investors from acquiring more than 10 percent of the company, a move to prevent a hostile takeover. Icahn said today that the Dollar Tree deal was an affirmation of his aggressive approach.
“This is a big win for all shareholders of Family Dollar and yet another validation of the activist investment philosophy in general,” he said.
In teaming up, Dollar Tree and Family Dollar are creating a bigger rival to Dollar General, which has long been the industry leader. The merged companies would have about the same amount of revenue as that competitor -- Dollar General had sales of $17.5 billion last year -- and far more stores.
“Dollar General just got leapfrogged,” said Laura Champine, an analyst at Canaccord Genuity Corp. in New York. “This morning they were the biggest dollar store. Now they’re not.”
The new Dollar Tree, which plans to keep operating separate chains, would have more than 13,000 locations across the U.S. and Canada, with 145,000 employees. That compares with a total store count of about 11,000 apiece for Dollar General and Wal-Mart. Wal-Mart, though, usually has much larger stores, located around the world, and generates more than 20 times as much revenue.
Dollar Tree and Family Dollar have different approaches to retailing. At Dollar Tree, which traces its roots to a five-and-dime store in 1953, everything sells for $1 or less. Family Dollar, which began in 1959, operates more like a neighborhood discount store, offering items at a range of prices.
That means the chains will complement each other, Dollar Tree CEO Bob Sasser said in an interview. He sees “a lot of brand equity” at Family Dollar -- even after years of sluggish performance.
“It’s a big opportunity,” Sasser said. “At Family Dollar, they have good bones. They have good structure.”
Before forging today’s deal, Family Dollar had been trying to improve operations by closing about 370 underperforming stores and opening fewer new ones. It also has been lowering prices in a bid to entice shoppers. Dollar Tree, meanwhile, was in far better shape, Feldman said.
“You’re taking the best operator in the space and they’re adding in the weakest operator,” he said.
Sasser plans to improve sales by revamping the lineup at Family Dollar stores, focusing on the best-selling categories and scaling back the weaker ones. Levine also will remain with the company and report to Sasser. As part of Levine’s retention package, he will earn $1.15 million in salary and incentive compensation worth at least 100 percent of that, Family Dollar said in a filing. Levin also will get annual grants with a target of $600,000, along with $2 million in restricted stock.
The merger will save Dollar Tree about $300 million annually after three years, the Chesapeake, Virginia-based company said. The companies expect the transaction to close by early 2015 and contribute to Dollar Tree’s earnings per share within the first year.
The combined business will continue to operate under the Dollar Tree, Deals, Dollar Tree Canada and Family Dollar brands, according to the statement.
The sale is the culmination of a strategic review that Family Dollar began late last year, Levine said. Dollar Tree will generate “significant synergies” in areas such as procurement and logistics, and will have improved growth prospects, the companies said.
Family Dollar shareholders will own 12.7 percent to 15.1 percent of the outstanding stock of Dollar Tree when the deal is done. The amount of Dollar Tree shares may be adjusted depending on fluctuations in the stock’s price. Trian and Levine, representing a total of about 16 percent of shares, both support today’s agreement, according to the statement.
“The combination with Dollar Tree represents the best path forward for Family Dollar and is a great outcome for all of the company’s shareholders,” Trian said in a separate statement.
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