The stock closed at $78.67 yesterday, between the $74.50-a-share offer from Dollar Tree Inc. (DLTR) and the $80 hostile bid from Dollar General Corp. (DG) Traders are struggling to predict which suitor will win because even though Dollar General is offering a more attractive price, it faces tougher antitrust hurdles than Dollar Tree, which could still increase its bid.
Trying to guess the companies’ next moves and how regulators will rule is too risky for most shareholders, especially when they can exit now with a 23 percent return for
the year. Regardless of the outcome, any further possible gains are too small to justify exposure to the much larger potential downside, said Brian Yarbrough of Edward Jones & Co., who recommends selling the stock. He estimates Family Dollar would trade at about $50 a share in the absence of a buyout, wiping out the recent rally and then some.
“There’s too much risk involved here and not enough upside,” the St. Louis-based analyst said in a phone interview. “I’d rather tell clients to put the money to work elsewhere because the outcome is just too unknown at this point.”
Family Dollar Stores Inc. signage is displayed on a shopping cart in Davis, California.... Read More
Dueling Bids
After Matthews, North Carolina-based Family Dollar had already agreed to Dollar Tree’s cash-and-stock deal in July, Dollar General came in with a competing all-cash proposal. Family Dollar rejected the $80-a-share offer, which values the company at $9.7 billion including net debt, and so Dollar General this week took it directly to shareholders.Investment advisers and pension funds accounted for about 62 percent of Family Dollar’s shareholder base as of yesterday, while hedge-fund managers including billionaire John Paulson comprised 27 percent, data compiled by Bloomberg show. Paulson also owns Dollar General.
Family Dollar said it’s sticking with the Dollar Tree deal because there’s “material risk” that a merger with Dollar General would fail. The Federal Trade Commission, the regulatory body that needs to approve either transaction, may determine that selling to Dollar General will result in higher prices for shoppers and eliminate competition.
Second Request
Even Dollar Tree, which analysts have said has less overlap and therefore less potential for cost savings of the two suitors, received a second request from the FTC for more information, a sign that regulators are closely inspecting the deal.“Dollar Tree and Family Dollar have been through the thick of it with the second request from the FTC and they don’t even have as much overlap,” Joan Storms, a Los Angeles-based analyst at Wedbush Securities Inc., said in a phone interview. “So there’s a long road to haul for Dollar General to close this.”
Family Dollar shares are trading between the two bid prices, reflecting the variety of possible outcomes: Dollar General may secure enough shareholder support to proceed, with the risk that it gets blocked by the FTC. Or that risk may be enough to sway shareholders to opt for Dollar Tree’s lower offer. Or Dollar Tree, unsolicited, could increase its bid to stave off any support for Dollar General.
Taking Sides
The Dollar Tree deal so far is backed by Family Dollar’s board and Chairman and Chief Executive Officer Howard Levine, who is the largest shareholder. Edward Garden, chief investment officer of Trian Fund Management LP, Family Dollar’s second-largest shareholder, has also voiced support for the deal. Levine and Trian hold a combined 15.5 percent of Family Dollar shares, according to data compiled by Bloomberg.At yesterday’s closing level of $78.67, Family Dollar’s stock has only $1.33 of potential upside if Dollar General wins the bidding war, and $4.17 of potential downside if Dollar Tree wins, based on the latest offer prices.
For those merger-arbitrage traders who can stomach the risk, MKM Partners LLC’s Keith Moore says the bidding war has a chance of reaching $84 a share. He’s predicting that Dollar Tree will raise its offer just before the shareholder vote and that Dollar General will counter again.
A representative for Chesapeake, Virginia-based Dollar Tree declined to comment. A representative for Goodlettsville, Tennessee-based Dollar General didn’t respond to a phone call seeking comment.
Upside Odds
“For institutional shareholders, it makes sense to make sales because the highest probability is that there’s not a lot of upside from here,” Moore, an event-driven strategist at MKM in Stamford, Connecticut, said in a phone interview. “But I still think you could ultimately see $83 or $84 because once this asset is bought by one buyer, the buyer that’s left out really doesn’t have a lot of choices” for other takeover targets to pursue.Dollar Tree’s capacity to increase its offer is limited. The company said in July that its goal would be to return to an investment-grade credit rating within about five years of the deal. Dollar Tree would have to raise an additional $626 million if it wanted to include more cash in its offer to put the total price on par with Dollar General’s bid.
Dollar Tree doesn’t necessarily have to match Dollar General’s bid, according to Efraim Levy, a New York-based analyst at S&P Capital IQ.
“To be competitive, they don’t have to match, they just have to get close enough,” Levy said in a phone interview. “If they come up to $78 or $79, it makes it easier for Family Dollar management to justify pushing to stay with the Dollar Tree offer.”
That price is about where the stock traded yesterday, still offering little incentive for investors to continue buying. And either acquirer would still have to pass regulatory muster.
“To be buying the stock today and making a bet on antitrust, that’s not a bet I’d be willing to make at this point,” Yarbrough said. “Why would you buy it today if the upside is only $80?”
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