Dollar Tree deals for Family Dollar
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. 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.
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.
Stockholders of Family Dollar Stores will receive $59.60 in cash and the equivalent of $14.90 in Dollar Tree shares 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.
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.
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