Discount chain Dollar Tree Inc will buy rival Family Dollar Stores Inc for about $8.5-billion (U.S.), in a surprise deal that will help it fend off increasing competition from big-box retailers such as Wal-Mart Stores Inc.
Dollar stores have struggled in a weak U.S. economy as Wal-Mart and other large retail chain chase penny-pinching consumers by offering more items priced at $1 or less.
The deal will give Dollar Tree more than 13,000 stores across the United States and Canada, vaulting the company ahead of Dollar General Corp to become North America’s biggest discount retailer.
Family Dollar’s sale is a big win for activist investor Carl Icahn, who has been urging the company to sell itself.
The company’s shares rose to $74.35 in early trading. Dollar Tree’s cash and stock offer valued Family Dollar at $74.50 per share. Dollar Tree shares were up 6.9 per cent at $57.84.
Based on Reuters’ calculations, Icahn – who wanted Family Dollar to sell itself to Dollar General – stands to make a profit of about $200-million based on the price at which he bought his 9.4 per cent stake in the company.
Family Dollar CEO Howard Levine and Trian Fund Management LP, collective owners of about 16 per cent of Family Dollar, support the deal, the companies said.
“Trian strongly believe that the combination with Dollar Tree represents the best path forward for Family Dollar ... ,” Trian spokeswoman Anne Tarbell said in an email.
Family Dollar has slashed prices, cut jobs and shut hundreds of stores as it seeks to reverse declining sales and earnings. It also implemented price cuts on 1,000 basic items.
“With a new sheriff in town, Family Dollar will be a much sharper competitor going forward, creating margin pressure in the process,” Sterne Agee & Leach analysts wrote in a note.
Dollar Tree, whose products cost $1 or less, caters to the middle class. Family Dollar also sells many items priced at $1 or less, but stocks higher-priced items as well.
“This acquisition will extend our reach to lower-income customers and strengthen and diversify our store footprint,” Dollar Tree CEO Bob Sasser said.
Desjardins Securities analyst Keith Howlett said in a research note Monday that the deal will likely not have much of an impact on Canada’s dominant player, Dollarama Inc.
“Dollarama continues to grow rapidly and profitably in Canada, while generating industry-leading EBITDA margins. Its valuation exceeds that of the takeover valuation of Family Dollar (which has seen growth slow in recent years, resulting in recent and pending store network rationalization),” he said.
Montreal-based Dollarama has been rated as the top performing discount retailer over the past three years.
The company has stated it wants to open between 70 and 80 stores in Canada in 2014. It currently has about 900 locations.
Mr. Howlett said he does not see a near-term impact of the Dollar Tree-Family Dollar merger on Dollar Tree’s expansion plans in Canada.
Dollar Tree currently has 200 stores in the country, with stated plans to eventually have 1,000, he said.
“Our speculation is that Dollar Tree is either not yet profitable, or very marginally profitable, in Canada.”
Mr. Howlett said Dollar Tree’s chief executive said on the conference call Monday “did not rule out the possibility of eventually bringing the Family Dollar brand to Canada.
He added that he does not believe there is room for Family Dollar in Canada.
Dollar Tree offered $59.60 in cash and the rest in stock for each Family Dollar share, a premium of about 23 per cent over Family Dollar’s close on Friday.
The transaction has an enterprise value of about $9.2-billion, Dollar Tree said.
Family Dollar had about 114 million shares outstanding as of July 5 and long-term debt of about $484.2-million as of May 31.
Dollar Tree said it expects to save about $300-million annually by 2018, three years after the deal is likely to close.
Dollar Tree said it had secured bridge financing from JP Morgan Chase Bank that, along with existing cash and bonds, would be used to finance the deal.
J.P. Morgan Securities LLC is financial adviser to Dollar Tree. Morgan Stanley & Co LLC is advising Family Dollar.
Dollar General’s shares were down 1.5 per cent at $54.73.
With files from Globe and Mail reporter Bertrand Marotte.
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