Charlotte Observer
9:24 am
Mon July 28, 2014

Dollar Tree To Acquire Matthews-based Family Dollar For $8.5 Billion

Credit Jennifer Lang / WFAE

Dollar Tree, the nation’s leading discount variety store, announced Monday morning that it is buying Matthews-based Family Dollar Stores Inc.

The cash-and-stock deal has a value of $8.5 billion, company officials said. It heads off a potentially long and ugly proxy fight with activist investor Carl Icahn, who has been pushing to force a sale of the company.

The sale is the culmination of a months-long effort by Family Dollar to improve its performance, after lagging competitors such as Dollar General and Dollar Tree. The company has tried closing 370 underperforming stores, laying off more than 100 corporate workers in Matthews, reshuffling executives and adding beer and wine nationally, but Family Dollar hasn’t closed the gap.

Though Family Dollar executives said they wanted to go it alone and believed that the retailer would successfully transform as a standalone company, they were ultimately unable to fend off Icahn’s plans.

For the Charlotte region, the deal represents the loss of another major corporate headquarters, following Harris Teeter’s acquisition by Kroger and Chiquita’s plans to relocate to Ireland. Though Sealed Air Corporation, the maker of Bubble Wrap, said last week that it’s moving to Charlotte, losing Family Dollar’s headquarters means the Charlotte region will see the departure of a company with deep roots and strong local ties from the board of directors on down.

The companies told investors Monday morning that they plan to save $300 million a year by finding synergies in areas such as sourcing merchandise and cutting expenses. The one-time cost of combining the companies is expected to be about $300 million.

Dollar Tree, based in Chesapeake, Va., said stockholders of Family Dollar Stores will receive $59.60 in cash and for every share they own. They will also receive $14.90 worth of Dollar Tree shares – the current price of one share of Dollar Tree stock. When the deal is complete, Family Dollar shareholders will own about 13 to 15 percent of the new, combined Dollar Tree, executives said.

Company officials said Dollar Tree will pay a total $74.50 a share, a premium of 22.8 percent over Family Dollar’s closing price of last Friday.

Stock futures Monday morning showed Family Dollar shares jumping almost 25 percent before the stock market opened. Dollar Tree shares were up about 6 percent.

Family Dollar employs about 1,400 people at its headquarters on Monroe Road in Matthews. With 8,100 stores, it ranks second to Dollar General’s 11,000 stores in the variety discount business.

Last month, Icahn told Family Dollar chief executive Howard Levine that he wanted the company sold immediately. Icahn, who disclosed that he is the largest individual shareholder of Family Dollar with 9.4 percent of the stock, said he was ready to go to shareholders for a vote to fire the company’s entire board of directors if a sale did not take place.

At the time, analysts said Dollar General, Walmart and private equity firms would be the most likely buyers of Family Dollar. Some analysts theorized that Dollar General might not be able to pull off enough cost-cutting in a buyout to make the deal work, and many analysts predicted that no sale would happen.

Dollar Tree CEO Bob Sasser called the purchase “a transformational opportunity.”

“This acquisition, which enhances our footprint and diversifies our company, will enable us to build on that progression, and importantly, positions Dollar Tree for accelerated growth,” Sasser said.

Levine said the deal “will enable Family Dollar to accelerate efforts to improve the business and will benefit our dedicated team members, who will now be part of a larger, more diverse organization.”

Sasser said Levine will remain with the merged company and report directly to him. Levine also will join the Dollar Tree board of directors, Sasser said.

Levine is the second-largest shareholder of Family Dollar, with about 8 percent of shares outstanding. At the total announced price of the deal, his stake in the company is worth almost $700 million, and Levine will receive $555 million in cash.

According to a securities filing Monday, Levine pledged to vote his shares in support of the deal. So did Nelson Peltz, an activist investor who tried to buy the company in 2011 for $55 a share. Peltz’s company has a seat on the board, and he controls 7.3 percent of Family Dollar’s stock.

Family Dollar will continue to operate under its current name, executives said, as a separate banner. Sasser said the company will continue to operate the Dollar Tree, Deals and Dollar Tree Canada brands, and he added, “When this transaction is complete, we will operate under the Family Dollar brand as well.”

Dollar Tree officials said the merged company will target a broader range of customers. They said Dollar Tree stores typically are in suburban areas, while Family Dollar stores are mostly in urban and rural areas.

The deal is being financed through a combination of $569 million worth of cash on hand, a $5.4 billion term loan, and up to $2.8 billion worth of unsecured bonds, according to a presentation to investors. J.P. Morgan Chase has committed to financing the deal.

Although Dollar Tree and Family Dollar are both discount stores, they have significantly different business strategies. Dollar Tree sells all of its goods at a price of $1, while Family Dollar has multiple prices, aiming to be below $10. Only about one in eight items in Family Dollar’s stores are $1 or less.

Dollar Tree also has more employees, 87,000, compared with Family Dollar’s 50,000, even though the company operates about 3,000 fewer stores than Family Dollar. And Dollar Tree is more heavily weighted towards optional goods, such as toys and seasonal decorations, while Family Dollar is focused on selling consumer staple goods.

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