Family Dollar Lifts Odds of Sale at 39% Premium: Real M&AChelsey Dulaney
Family Dollar Stores Inc. may be in play again after a standstill with activist investor Nelson Peltz expired.
The shares have rallied 7 percent and options prices showed record takeover speculation since July 22, when Peltz’s restriction on raising his stake to more than 9.9 percent was lifted, according to data compiled by Bloomberg.
Private-equity bidders could be drawn to the opportunity to make Family Dollar more efficient, Edward Jones & Co. said. The retailer’s margins lag behind those at Dollar General Corp., which KKR & Co. bought in 2007 and took public two years later. A buyout by Dollar General, which has more than double Family Dollar’s $8.3 billion market value, may cut costs at the smaller company, Albert Fried & Co. said. Credit Suisse Group AG sees Family Dollar getting as much as a 39 percent premium to yesterday’s closing stock price in a sale.
The expiration of the pact with Peltz “would certainly make it easier for an acquisition,” Scott Mushkin, a New York-based analyst at Wolfe Research Securities, said in a phone interview. “Family Dollar’s business is just very average right now, so I think that’s why this fantasy of either a private-equity bid or Dollar General taking them out is being rekindled.”
Bryn Winburn, a spokeswoman for Matthews, North Carolina-based Family Dollar, declined to comment on whether the company would be interested in selling itself or whether it has held takeover talks. Crystal Ghassemi, a Dollar General spokeswoman, declined to comment on whether it would be interested in buying Family Dollar.
Anne Tarbell, a spokeswoman for Peltz’s Trian Fund Management LP, said the investment firm has no comment on whether it will bid again for Family Dollar or support an offer from another company. Trian has a 7.3 percent stake in Family Dollar, whose shares rose 0.8 percent to $72.42 today.
Family Dollar rejected a $55-to-$60-a-share offer from Trian in 2011, saying it “substantially” undervalued its business. The retailer also adopted a defense to discourage unsolicited bids. Peltz withdrew his offer in September 2011, when the two parties signed the standstill agreement and Trian’s chief investment officer was given a board seat.
Family Dollar’s board removed the poison pill in November. The standstill ended on July 22, and the ensuing Family Dollar rally shows investors are betting a deal is possible, said Mushkin, who sees Dollar General or private-equity firms as potential suitors.
The options market also showed traders clamoring to wager on an acquisition. Three-month calls betting on a 10 percent advance in the stock were 2.47 points more expensive than puts protecting against a 10 percent drop on July 25, the highest in Bloomberg data going back to 2005.
Dollar General, a discount retailer based in Goodlettsville, Tennessee, emerged from private-equity ownership with higher operating margins than Family Dollar: 10.2 percent during the past year versus Family Dollar’s 6.6 percent. Buyout firms may want the chance to improve Family Dollar’s efficiency, said Brian Yarbrough, a St. Louis-based analyst at Edward Jones.
“If you look at what KKR did with Dollar General, they really improved the company,” he said in a phone interview.
By paying $85.50 a share for Family Dollar, a private-equity buyer could earn a 15.7 percent internal rate of return, according to Citigroup Inc.’s Deborah Weinswig. The New York-based analyst said in a July 17 report that the odds of a Family Dollar takeover are 50 percent.
The company could fetch $90 to $100 a share in a takeover, said Edward Kelly, a New York-based analyst at Credit Suisse. By purchasing Family Dollar, Dollar General could increase its presence in urban areas, the analyst wrote in an Aug. 7 report. Dollar General has more than 10,600 stores, while Family Dollar has almost 8,000. As much as $650 million in cost savings might result, Kelly said.
Family Dollar shares have surged 65 percent since Peltz made his takeover offer in February 2011. While that lags behind the 102 percent gain for Dollar General, it beats the 27 percent rise in the Standard & Poor’s 500. Following the rally, buyers may consider the company’s price tag too expensive, said Mark Montagna, a Nashville, Tennessee-based analyst at Avondale Partners LLC.
The retailer has attracted other high-profile investors since Peltz announced his takeover offer in 2011. Billionaire John Paulson purchased shares this year. Three months after the Peltz bid, Bill Ackman said he bought a stake. He sold the shares in 2012.
If Family Dollar Chairman and Chief Executive Officer Howard Levine can be persuaded to sell, the company’s owners should welcome that, said Sachin Shah, a merger arbitrage and special situations analyst at New York-based Albert Fried. Levine has an 8.2 percent stake in Family Dollar, according to data compiled by Bloomberg.
“The best opportunity for shareholders here is to see a strategic transaction,” Shah said. The company is “sitting in this ‘wait and see’ approach, but time may not be on their side. To me, doing a deal sooner rather than later makes more sense.”