Family Dollar Investors Raise Bets on Sale as Short Sellers Flee: Real M&A
Family Dollar Stores Inc. (FDO) shareholders aren’t writing off an acquisition of the second- largest U.S. dollar chain just yet.
Family Dollar has gained 21 percent in the past seven weeks to $54.84 yesterday as Bill Ackman’s hedge fund disclosed it doubled its stake in the Matthews, North Carolina-based company and the deteriorating economic recovery drove investors to discount retailers. The shares were just 16 cents below a rejected February takeover bid of at least $55 a share from billionaire investor Nelson Peltz for the narrowest spread since July 7, according to data compiled by Bloomberg.
Traders who sell borrowed shares of Family Dollar on the assumption they can be purchased later at a lower price are also cutting those bearish bets to the lowest level since at least 2006. While the retailer rejected Peltz’s offer and adopted a poison pill capping shareholders at 10 percent ownership, Family Dollar may still draw interest from Dollar General Corp. (DG), or Ackman and Peltz may team up to convince Chief Executive Officer Howard Levine to sell, according to Tullett Prebon Plc.
“There’s a high probability that something gets done,” Sachin Shah, a Jersey City, New Jersey-based special situations and merger arbitrage strategist for Tullett Prebon, said in a telephone interview. “Dollar General is the most logical buyer, but there could also be some dialogue among Peltz, Ackman and Levine and the board to take it private. You have all these interested parties out there.”
Josh Braverman, a spokesman for Family Dollar, didn’t respond to a phone call or e-mail requesting comment. Tawn Earnest, a spokeswoman for Goodlettsville, Tennessee-based Dollar General, said the company doesn’t comment on rumors or speculation.
Carrie Bloom, a spokeswoman for Peltz’s Trian Fund Management LP, said Peltz declined to comment regarding Family Dollar. Ackman didn’t respond to a phone call or e-mail requesting comment.
Peltz’s Trian hedge fund offered on Feb. 15 to buy Family Dollar for $55 to $60 a share, or as much as $7.7 billion including net debt. The proposal represented a premium of as high as 39 percent to the company’s 20-day trading average of $43.08 prior to the bid. Peltz, 69, invited Chairman and CEO Levine, 52, to join him in the acquisition.
Family Dollar’s board rejected the bid in March, saying it “substantially” undervalued the business. The board also said pursuing a sale wasn’t in the best interest of shareholders.
Family Dollar then fell to a six-month low of $45.14 on Aug. 8 as the Standard & Poor’s 500 Index posted the biggest drop since 2008. Since then, the shares rebounded 21 percent through yesterday, outpacing a 3.9 percent gain for the S&P 500. The closing price of $54.84 yesterday was less than 1 percent below the low end of Peltz’s all-cash offer, as traders pushed the gap to the narrowest since July 7, data compiled by Bloomberg show.
“The stock seems to be pricing in continued interest or speculation of a takeout,” Patrick McKeever, a Grosse Pointe, Michigan-based analyst at MKM Partners, said in a phone interview. “There’s still plenty of big-money, activist- investor interest in the dollar store space.”
Family Dollar dropped 66 cents, or 1.2 percent, to $54.18 today. The company said today that it named Michael K. Bloom president and chief operating officer to replace R. James Kelly, who’s retiring after 15 years with the retailer.
Abandoned Bearish Bets
Short interest in Family Dollar fell to 581,000 shares as of Sept. 22, or 0.5 percent of shares available for trading, the lowest level since at least 2006, according to London-based research firm Data Explorers. The amount of short selling has plunged 86 percent since Sept. 16, the data show.
Traders have abandoned bearish beats against Family Dollar amid signs that the recovery from the longest recession since the Great Depression is deteriorating. The Federal Reserve said last week that there are “significant downside risks” to the economy, while a government report this month showed U.S. payrolls were unchanged in August, the weakest reading since September 2010.
Discount stores such as Family Dollar are “the venue of choice in down times for large parts of the country where jobless rates are high and the desire to stretch a buck is intense,” Thomas Russo, who manages about $4 billion as a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania, said in a phone interview. “The environment feels relatively frugal.”
Buffett typically prefers “simple” businesses with pretax profit exceeding $75 million, “consistent” earning power, and “good” returns on equity while employing little or no debt, according to his report.
Ackman’s Pershing Square Capital Management LP hedge fund disclosed in a regulatory filing Aug. 15 that it boosted its holdings of Family Dollar by 5.33 million shares to 11.1 million in the quarter ended June 30. Ackman, founder of New York-based Pershing, said in May that he bought a “passive” stake in Family Dollar because it was “very reasonably priced” and “attractive” for a leveraged buyout.
Ackman, 45, and Peltz may collaborate to take the company private rather than push independently for a sale, Tullett Prebon’s Shah said. Ackman is known for investing in companies he deems undervalued and urging changes he says will improve shareholder returns, while Peltz often buys stakes and agitates for changes to increase the valuation, rarely buying entire companies.
“History shows that that tends to be part of their approach to have constructive conversations with management on what can be done to improve the stock over time,” Matt Arnold, an analyst for St. Louis-based Edward Jones & Co., said in a phone interview. When Ackman’s involved “in an investment, there’s always a strong possibility of some type of influence, whether it’s fundamental or something more,” he said.
Peltz’s offer for as much as $60 a share may not be enough to complete a deal, Shah said. That leaves the door open for Dollar General, the biggest U.S. dollar discount retailer, to potentially bid about $70 a share in cash and stock, he said. Private equity firm KKR & Co. took Dollar General private in July 2007 for $7.3 billion and the company sold shares in an initial public offering in November 2009.
While a takeover of Family Dollar may result in cost savings for Dollar General, the combination would likely face regulatory scrutiny, Edward Jones’s Arnold said.
‘Clamoring for Change’
In addition to takeover speculation, Family Dollar shares have been boosted by improvements in earnings and operations. The company increased its quarterly dividend by 16 percent in January.
Family Dollar, which plans to report earnings results tomorrow, may say revenue rose 8.5 percent to $8.54 billion in the year ended Aug. 31, based on analysts’ estimates compiled by Bloomberg. Operating margins have increased in each of the last 13 quarters from the prior year period. The company made 7.4 cents for each dollar of sales in the most recently reported 12 months, trailing Dollar General’s 9.9 percent margin.
“Their relative underperformance versus Dollar General originally made them an attractive takeover target,” Mark Montagna, a Nashville, Tennessee-based analyst at Avondale Partners LLC, said in a phone interview. “Everybody’s going to want to see, are they closing the gap on margin? If they’re not, you certainly could have these activist investors clamoring for change.”