It was an interesting day in the markets for companies with the word “dollar” in their name, as dollar store giant Dollar Tree (DLTR) purchased rival company Family Dollar (FDO) for $8.5 billion. This makes Dollar Tree the largest dollar-store chain in the US, eclipsing previous leader Dollar General (DG) .
Family Dollar has been in the news since investor Carl Icahn took a vested interest in the company. In typical Icahnian fashion, the activist investor pushed for Family Dollar to put the business up for sale and thus maximize shareholder value – or more specifically, Icahn’s shareholder value.
Poison Pill: Swallowed
In response to Icahn’s interest, the company adopted a shareholder’s rights plan, colloquially known as a “poison pill.” This was seen as a move that, while not blocking Icahn’s plans outright, would give company insiders leverage in negotiating a deal.
Such a deal has obviously been struck. According to The New York Times, a group of shareholders that possessed 16% of the company’s stock, including CEO Howard R. Levine, have agreed to back the deal.
Icahn’s push for Family Dollar to merge with a competitor was not without its reasons. Among the value discount chains, Family Dollar had been suffering the most, and was forced to close some 370 stores.
The merger of the two businesses puts Dollar Tree in an advantageous position, bringing the total number of stores of the combined chains to 13,000. This is approximately 1,700 more than Dollar General. It is not known at this time how many stores, if any, Dollar Tree plans on closing to eliminate intra-competition.
Following the merger, Family Dollar stores will retain their name.
Family Dollar a Favorite of the Big Guys
Family Dollar had piqued the interest of a couple very high-profile investors, who saw a lot of value to be unlocked in a suffering chain that nevertheless owned a popular name and potential to compete with Wal-Mart (WMT) in the low-end retail market. Aside from the aforementioned Icahn, billionaire John Paulson took a major interest in Family Dollar in 2013, adding to an already established position.
Shares of Dollar Tree rose slightly on the day, presumably on the company’s newfound diminished competition. Dollar Tree’s stock notched up 2.36% to hit $55.49 a share.
As Dollar Tree’s buyout price placed a premium on Family Dollar, shares of the company predictably skyrocketed on the news. Family Dollar’s stock rose 24.55% to hit $75.55 a share. This erased a year-long loss the company had operated under, and represented the company’s all-time high valuation.