Monday, January 26, 2015

Dollar Tree Family Dollar Acquisition: A Rare Win-Win

DG began acquisition discussions with its smaller competitor, FDO, last summer. Another smaller rival, DLTR, emerged with an $8.7B mix of stock and cash offer-representing a 22% premium to its 7/25/14 price. DG responded with a $9.1B all cash offer. Ordinarily, a higher all cash offer would prevail as its value is clear. Nonetheless, DG’s offer contained a substantial risk of not closing due to real antitrust concerns.

DG was the largest of the three major players in the “dollar” retail industry at $4.7B in revenues and 11,700 stores compared to DLTR’s $2.1B and 5200 stores and FDO’s $2.6B and 8100 stores. Whenever the #1 buys the #2 in the same industry- antitrust issues become a real concern. It was estimated DG needed to jettison over 1500+ stores to may be satisfy the FTC; while DLTR with less overlap would close less than 500 stores. Recognizing this- DG offered a $300 mln+ breakup fee. Perhaps, DG wanted to remain the dominant industry participant and prevent the formation of a larger rival.

Last week, FDO shareholders  accepted the lower priced DLTR offer given its greater chance to close. Interestingly, the market was positive for all three firms. The stock price increase for DLTR and FDO is somewhat understandable. It signals belief in the synergy benefits of the combination and removal of uncertainty for FDO’s shareholders. Additionally, DLTR appears to have a better chance of turning around the struggling FDO which had suffered a 47% drop in earnings for the 11/14 quarter end.

Looking at the 3.7% increase in DG’s stock rise one can conjecture the following reasons:

1)     The price was too high relative to the possible benefits it could extract. Another way of saying it is DLTR is the better owner.

2)     Closing 1500+ stores given the premium offered makes you wonder what’s in it for DG’s shareholders. That is a lot to give up relative to DLTR.

3)     DG foregoes the possibility of paying a $300 mln breakup fee if the deal failed to obtain antitrust approval.

Yes, DG is smaller than it would be if the acquisition proceeded, but its shareholders are richer- better off. Yes, DG faces a new and larger combined DLTR-FDO competitor. The new DLTR, however, faces real integration and turn around issues. Furthermore, it will be saddled with a heavy debt load comprised of $5.4B in term debt plus another $2.8B in new senior unsecured notes. Well- in any event the market has spoken. My gut tells me DG’s shareholders dodged a bullet on this one and should thank the FDO shareholders for rejecting their offer and thereby preventing a forced DG managerial error.


No comments:

Post a Comment