Family Dollar Near-Record Offer Seen Prevailing: Real M&A

Dollar Tree Inc.’s offer for Family Dollar Stores Inc. at a near-record price may be enough to get a deal done without a bidding war.

Family Dollar received a $74.50-a-share takeover proposal yesterday from Dollar Tree, a surprise suitor after activist investors including Carl Icahn had pushed for a sale to rival Dollar General Corp. While the stock closed about $1 higher than the offer, MKM Partners LLC said other potential bidders, whether Dollar General or private-equity firms, are unlikely to step forward after they sat on the sidelines during three years of sale speculation.

Dollar General was offered a chance to bid and declined, a person with knowledge of the process said. Icahn, who said other suitors could create more synergies, still called the Dollar Tree deal a “big win” for Family Dollar shareholders. Prior to the announcement, the $8.6 billion discount chain had only reached the takeover price once on its own. Avondale Partners LLC said Dollar Tree faces fewer regulatory hurdles as a buyer, which may give the $11 billion company an advantage.

“It’s a home-run deal for the Family Dollar shareholders,” Mark Montagna, a Nashville, Tennessee-based analyst at Avondale, said in a phone interview. “I think it’s the end of it.”

Dollar Tree is paying about $9 billion, including debt, in cash and stock to acquire Matthews, North Carolina-based Family Dollar. The proposal values the company at about 11 times its earnings before interest, taxes, depreciation and amortization in the past 12 months, topping the median multiple for similar-sized retail deals in the last five years, according to data compiled by Bloomberg.

Stock Moves

After trading below Dollar Tree’s $74.50-a-share offer for much of the morning yesterday, Family Dollar rose as high as $76.82 as traders wagered another bidder could push the price even higher. The shares closed at $75.74.

“There’s hope that a strategic buyer might step in,” Dutch Fox, an analyst at FBR & Co., said in a phone interview. “We handicap that as a relatively low probability. There’s no obvious other contender beside Dollar General that’s going to come and break this merger up.

‘‘I don’t think they’re interested,” he added.

Dollar General was offered a chance to bid for Family Dollar and declined the opportunity, according to a 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 feels it’s highly unlikely that a bidding war will begin, said the person, who asked not to be identified because the discussions were private.

Today, shares of Family Dollar fell 1.6 percent to $74.50. Dollar Tree declined 0.8 percent to $54.44, and Dollar General advanced 1 percent to $56.10.

‘Out of Nowhere’

While other suitors may be in a position to offer more cost savings and revenue benefits and he’s hopeful that they surface, Icahn called the sale to Dollar Tree a “big win for all shareholders.” The activist investor revealed a stake in Family Dollar in June and joined Trian Fund Management LP’s Nelson Peltz in pushing for a sale.

Peltz made an unsolicited offer for Family Dollar in 2011 in an attempt to draw other suitors. Dollar General was analysts’ buyer of choice at the time, though it has yet to make a public approach. Instead it’s now Dollar Tree, the company’s smaller rival, that has Family Dollar in its grasps.

“Dollar Tree kind of came out of nowhere as a contender and now as a buyer for Family Dollar,” Poonam Goyal, a retail analyst at Bloomberg Intelligence, said in a phone interview. “It was not the most-talked about buyer in the past.”

Dollar Bin

The deal makes sense though, said Joseph Feldman of Telsey Advisory Group. Because Family Dollar and Dollar Tree have different approaches to retailing, with the latter focused on products that sell for $1 or less, it will be somewhat easier to operate the brands side by side, he said. By contrast, Dollar General and Family Dollar both operate like neighborhood discount stores, offering items at a range of prices.

“They’re right across the street from each other just about everywhere,” Feldman said. “Why double your store base and have either a significant number of stores that you need to close or want to close and then be burdened with all of that? It just didn’t necessarily make sense. There’s a little more of a differentiation between Family Dollar and Dollar Tree.”

That puts Dollar Tree in a better position to gain regulatory approval for the takeover, whereas Dollar General may have faced obstacles because of the significant overlaps with Family Dollar, said Montagna of Avondale.

Dollar General Chief Executive Officer Rick Dreiling’s June announcement that he plans to retire made a deal less likely in the near term because of the uncertainty tied to such a major management change, analysts from Royal Bank of Canada and Johnson Rice & Co. said at the time.

Better Savings

Even so, with Family Dollar now slipping away to another suitor, the $17 billion company should consider bidding because it can get more out of a deal than Dollar Tree, Edward Kelly, a New York-based analyst at Credit Suisse Group AG, wrote in a report yesterday.

Wal-Mart Stores Inc. and private-equity firms have also been speculated as potential buyers. While Wal-Mart is adding smaller-format locations, the world’s largest retailer probably prefers to grow that presence on its own rather than via acquisition, said Montagna of Avondale. For buyout firms, the price may be too high, said Keith Moore, an event-driven strategist at MKM.

Plus, other suitors have had plenty of time to make a bid for Family Dollar in the three years since Peltz first encouraged a sale, Moore said.

“This process has been going on quite a while,” he said in a phone interview. “It was pretty obvious that they were under pressure. In the end basically, I’d place a very low probability on another bid.”

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