Dollar Tree is buying Family Dollar for $8.5 billion. The combined company will have far more stores than Wal-Mart or Target, though Wal-Mart's square footage will still be larger.
Ben Torres, Bloomberg
Dollar Tree steps up fight, buys Family Dollar
- Article by: CANDICE CHOI
- Associated Press
- July 29, 2014 - 10:38 AM
NEW YORK — The fight for penny pinchers is intensifying.
Dollar Tree said Monday it is buying rival discounter Family Dollar for $8.5 billion, significantly broadening its reach as it looks to fend off Wal-Mart, which has been stepping up its courtship of lower-income customers
The deal makes Dollar Tree the biggest player in the dollar store segment, with its more than 13,000 combined locations eclipsing current leader Dollar General Corp., which has about 11,300.
Dollar stores grew during the recession as people across income groups searched for cheaper options. To attract a broader array of customers, they also expanded their offerings to include more groceries and brand-name products, instead of just the party favors and other knickknacks people often associated with them.
More recently, however, sales at dollar stores have been suffering because the lower-income customers who go to them are facing persistent job instability and slow wage growth in the aftermath of the recession. Wal-Mart Stores Inc. and Kroger Co. also have been opening smaller store formats to directly compete with dollar stores. During its current fiscal year, Wal-Mart plans to open 270 to 300 smaller outlets designed to cater to shoppers looking for more convenience.
Brian Sozzi, CEO and chief equities strategist at Belus Capital Advisors, said because the Dollar Tree deal will allow the company to lower expenses by merging its operations, it will ultimately be able to lower prices to better compete with Wal-Mart.
"Now they're going to take the fight back to Wal-Mart," Sozzi said.
Minneapolis-based Target Corp. also has been moving more into the dollar store space by experimenting more with smaller store formats. Target opened its first 20,000-square-foot TargetExpress store in Dinkytown last week.
In a research note, David Strasser, an analyst with Janney Capital Markets, wondered if Wal-Mart and Target might lose some leverage with some vendors as a result of Monday’s deal. He also wondered if either might be interested in buying Dollar General. He said Wal-Mart was a more-likely suitor given that Target already has plenty on its plate, including fixing its Canadian division, and is also looking for a new CEO.
Target declined to comment about analysts’ speculation.
The deal also gives Dollar Tree more flexibility.
Dollar Tree is true to its name, with everything in its stores costing just a buck. The fixed pricing has helped attract more customers and boosted sales, but it also puts the company in a tough spot as inflation pushes up its costs and pressures profit margins. Family Dollar is far more flexible in its pricing, which allows it to sell a greater variety of items, including Kraft cheese and Tide laundry soap, at various price points.
Still, Family Dollar, which has more than 8,000 locations, has been shuttering stores and cutting prices in hopes of boosting its financial performance. Last month, investor Carl Icahn urged the company to put itself up for sale. Icahn has built up a stake in the company of more than 9 percent, according to regulatory filings. Based on his purchase price at the time, he stands to make nearly $200 million from the deal.
In a statement, Icahn said he was "extremely pleased" with Dollar Tree's plans, but that he still thinks there are "a handful of potential buyers who could realize greater synergies" with Family Dollar.
The companies did not say if any Dollar Tree or Family Dollar stores would be closed. Dollar Tree, which has about 5,000 locations, will continue to operate under the existing Dollar Tree, Deals, and Dollar Tree Canada store banners. It will keep the Family Dollar brand as well, with Chairman and CEO Howard Levine reporting to Sasser.
While dollar stores don’t have as big of a presence in Minnesota as some other states, the chains have been growing aggressively. Dollar Tree and Family Dollar have added a couple dozen stores in Minnesota in the last couple of years. Dollar Tree now has 85 stores in Minnesota while Family Dollar has 79.
The Twin Cities’ higher tax rates may have deterred the dollar chains from going big here in the past, said Jen Helm, a vice president for Cushman & Wakefield/NorthMarq Real Estate Services.
But she said the economic downturn has provided these chains with a prime opportunity to get into coveted spaces whose rents would have otherwise been too high during better economic times.
“They’ve been steady with opening stores and doing more deals in the market; I think you’ll continue to see that,” she said. “Now this will give them more momentum.”
But she said the acquisition could also lead to some store closings of locations that are too close together.
Dollar General, which has the largest store count nationwide, has only about 33 stores in Minnesota
Stockholders of Family Dollar Stores will receive $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share they own. The companies put the value of the transaction at $74.50 per share, which is an approximately 23 percent premium to Family Dollar's Friday closing price of $60.66.
Including debt and other costs, the companies estimate the deal to be worth more than $9 billion.
Family Dollar stockholders will own somewhere between 12.7 percent and 15.1 percent of Dollar Tree's outstanding common shares at closing. Dollar Tree plans to finance the deal with available cash, bank debt and bonds.
The boards of both companies unanimously approved the deal, which is expected to close by early next year. It still needs approval from Family Dollar shareholders.
Shares of Family Dollar Stores Inc., which is based in Charlotte, North Carolina, surged $14.89 to $75.55 in premarket trading. The record high during regular trading is $75.29.
Shares of Dollar Tree Inc., based in Chesapeake, Virginia, jumped 10 percent, or $5.50 to $59.72. The all-time high for that stock is $60.19.
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