Family Dollar Takeover Doomed With Shares Below Bid: Real M&A
Family Dollar Stores Inc., which billionaire investor Nelson Peltz offered to buy for $7.7 billion, is the most likely to fail among 2011 deals, according to traders who profit from mergers and acquisitions.
The stock is now $9.96 below the proposed bid of as much as $60 a share from Peltz’s Trian Fund Management LP, representing a premium of 20 percent if the deal were to close, according to data compiled by Bloomberg. That’s the widest price gap of any pending takeover announced this year, indicating merger arbitragers are projecting that Family Dollar won’t be purchased at that price.
Peltz, an activist investor who rarely buys entire companies, offered $55 to $60 a share last week for the second- largest U.S. dollar chain -- a bid that doesn’t have financing and would be the biggest acquisition of a U.S. retailer in six years. While Peltz likely won’t end up buying Family Dollar, his offer for the Matthews, North Carolina-based company may spur interest from larger rival Dollar General Corp. and others, according to Mark Miller, an analyst at William Blair & Co.
“I really question whether he intends on buying the company or if he was simply trying to put the company in play, hoping a more credible bidder would come in,” said Anthony Chukumba, a New York-based analyst at BB&T Capital Markets who rates the shares “hold.” “People are starting to do the work and ask themselves, ‘Is this deal really going to happen?’”
Peltz, 68, offered to acquire Family Dollar at as much as a 39 percent premium to the company’s 20-day average before the bid was made public in a U.S. Securities and Exchange filing on Feb. 15. Peltz, who invited Chief Executive Officer Howard Levine to join him, said the offer is conditioned upon obtaining financing, board and shareholder approval and due diligence.
The next day the shares jumped 21 percent, the most since at least 1980, according to data compiled by Bloomberg.
Since then the stock has declined every day, widening the gap with Peltz’s offer and signaling arbitrage traders don’t think the deal will close at that price. Of the more than 100 pending deals announced globally this year, Family Dollar was trading at the biggest discount to its takeover price when U.S. markets closed yesterday, data compiled by Bloomberg show.
“While the stock popped that day, the market’s saying there’s a lot of uncertainty left to this,” said Brian Sozzi, an analyst with Wall Street Strategies Inc. in New York. “It’s saying we don’t know if Peltz can get the financing, we don’t know his motive, we don’t know all of the components of this deal, and we don’t know if Family Dollar would rather boost shareholder returns in other ways.”
Reviewing the Proposal
Family Dollar said on Feb. 15 that it’s reviewing the proposal with financial advisor Morgan Stanley in New York.
CEO Levine, 52, who owned 7.5 percent of the stock as of last month, wasn’t available for an interview, said Josh Braverman, a spokesman for Family Dollar. Peltz declined to comment, according to Carrie Bloom, a spokeswoman for New York- based Trian.
Family Dollar, started as a single store in 1959 by Levine’s father Leon, won shoppers from larger rivals such as Wal-Mart Stores Inc. in Bentonville, Arkansas, adding packaged foods and other consumables during the recession. The company also started accepting food stamps in 2008.
With more than 6,800 stores in 44 states, the retailer is aiming for time-pinched consumers who grab a few items, such as canned soup and toothpaste, during the week rather than make trips to bigger discount and drug stores.
Boost Sales Growth
Trian is the largest outside investor in Family Dollar with about 7.9 percent of the stock outstanding as of Feb. 15, the filing said. The hedge fund run by Peltz, Peter May and Edward Garden first disclosed a stake in the discount retailer in July and urged it to boost sales growth and share buybacks.
Peltz is known for buying stakes in food companies, then agitating for changes to increase the valuation. Trian owns about 18 percent of Atlanta-based Wendy’s/Arby’s Group Inc., which is exploring a spinoff of the Arby’s brand after Peltz merged the two in 2008. He sold his $132 million stake in Northfield, Illinois-based Kraft Foods Inc., the second-largest food maker, in August after agreeing not to seek control.
He also played a role in Cadbury Plc’s 2008 spinoff of Dr Pepper Snapple Group and pressed for changes at Pittsburgh-based H.J. Heinz Co., the world’s biggest ketchup maker. Peltz also bought the Snapple beverage brand from Quaker Oats Co. for $300 million in 1997 and later sold it to Cadbury for $1.5 billion.
‘Rarely Actually Buys’
“If you look at his history, he rarely actually buys entire companies,” BB&T’s Chukumba said. “Even the companies that he has bought were fractions of the size of a deal we’re talking about,” he said, referring to Family Dollar.
At $7.7 billion including net debt, the Family Dollar deal would be the largest U.S. retail takeover since 2005, when Federated Department Stores Inc., now Macy’s Inc., paid $17.8 billion for May Department Stores Co., data compiled by Bloomberg show.
Peltz’s bid values Family Dollar at as much as 10 times its $761.5 million in earnings before interest, taxes, depreciation and amortization in the last 12 months. That’s higher than the median multiple of 8.1 times Ebitda for acquisitions of retailers greater than $1 billion announced in the last year.
Family Dollar would be a big transaction for Peltz, considering how much financing he’d have to raise, said Larry Carroll, who oversees $1.4 billion, including Family Dollar shares, as president and CEO of Carroll Financial Associates Inc. in Charlotte, North Carolina.
“He’d be very happy getting a good return on his investment and walking away without taking over the company,” said Carroll. He sold 12,000 Family Dollar shares for a customer Feb. 23 after advising to sell if the stock slipped below $51 or topped $55. “It’s hard to know what to do with the stock.”
Family Dollar closed yesterday at $50.04, 16 percent higher than its 20-day average before the Trian bid, giving it a market value of $6.3 billion. The shares fell 12 percent this year through Feb. 15, compared with a 3 percent gain for retailers in the Standard & Poor’s 500 Index.
The company, which doubled its net income in the past decade, lowered its profit forecast in January because of higher costs to renovate and open stores. Family Dollar trades at 18.4 times profit, compared with the 16.8 times average for U.S. discount retailers, data compiled by Bloomberg show. Dollar General has a price-to-earnings ratio of 16.6.
Dollar General, KKR
If the Peltz deal doesn’t go through, the company needs to find another buyer or announce a share repurchase to prevent the stock from declining, said Wall Street Strategies’ Sozzi. Dollar General and its New York-based owner KKR & Co. shouldn’t be ruled out as potential buyers, he said.
The odds of another bidder emerging have increased and are less than 50 percent, William Blair’s Miller said in a Feb. 16 research note.
Dollar General, based in Goodlettsville, Tennessee, may surface with a bid of $72 to $78 a share that would be accretive to its shareholders, Aram Rubinson, a New York-based analyst at Nomura Holdings Inc., said in a Feb. 16 research note. Such a combination may face regulatory hurdles, he said.
Tawn Earnest, a spokeswoman for Dollar General, declined to comment, as did Kristi Huller, a spokeswoman for KKR.
KKR paid $7.3 billion including net debt, or 16 times Ebitda, in a 2007 leveraged buyout of Dollar General. The retailer still has $3.3 billion in borrowings for a debt-to- Ebitda ratio of 2.35, higher than 82 percent of U.S. retailers with comparable market values, data compiled by Bloomberg show.
If Dollar General were to borrow as much as $7 billion to buy Family Dollar, its credit rating may drop to one level below investment grade, according to Bloomberg’s Company Credit Ratings, which analyze borrowers based on indebtedness, stock volatility, profitability and other financial ratios. The company is currently rated B3, two levels above junk.
“The notion that Dollar General and KKR would come in and buy Family Dollar is simply ludicrous,” BB&T’s Chukumba said in an interview.
Elsewhere in mergers and acquisitions, Quest Diagnostics Inc. agreed to buy a laboratory business from Waltham, Massachusetts-based Thermo Fisher Scientific Inc. for $740 million in cash as it expands into testing for neurological disorders including Alzheimer’s disease.
Athena Diagnostics has more than 350 tests to confirm or rule out physicians’ diagnoses of Alzheimer’s and neuromuscular and developmental disorders, Madison, New Jersey-based Quest said yesterday in a statement.
There have been 3,535 deals announced globally this year, totaling $337.2 billion, a 32 percent increase from the $254.8 billion in the same period in 2010, according to data compiled by Bloomberg.