Family Dollar asks shareholders to OK merger deal with Dollar Tree

The public fight for expanded turf among the three prominent dollar store players is expected to end with a shareholder vote by Family Dollar slated for Jan. 22. In what is likely closely watched by the top Wal-Mart bosses in Bentonville, Charlotte, N.C.-based Family Dollar said Monday (Jan. 12) it is unanimously recommending stockholders vote for the Dollar Tree Merger at the upcoming special meeting. This leaves suitor and competitor Dollar General out of the fight.

Dollar Tree has offered to buy Family Dollar for $9.2 billion or $76.85 per share. This deal is on the table until Jan. 22 and it’s take it or leave it, according to Dollar Tree CEO Bob Sasser.

"After two delays, we have been more than reasonable but have reached the end of our patience," Sasser said. "We hope that Family Dollar's shareholders decide to support Dollar Tree's transaction, with the premium value, certainty, timing advantages and further upside it offers. But we are prepared to accept whatever judgment they make."

The better deal for shareholders has been the $80 per share offered to Family Dollar shareholders by Dollar General. But recent news from Family Dollar CEO Howard Levine said the FTC probe has found that 5,850 stores between a Dollar General/Family Dollar deal would be problematic.

In other words, Levine said their best assumption would mean between 3,500 and 4,000 stores would need to be closed for the Dollar General deal to take place. Dollar General agreed to shutter up to 1,500 stores to make the purchase work, but Levine said that is not nearly enough according to the FTC report he received on Jan. 10.

Dollar General has not responded, but analysts believe the deal is no longer feasible given the recent FTC report. Dollar Tree has agreed to divest 300 stores in its proposal but said it will not wait beyond the Jan. 22 scheduled shareholder vote.

Analysts have favored the Dollar Tree deal for Family Dollar saying the two chains offer the combined retailer expanded opportunities as Family Dollar is located in more rural areas where as Dollar Tree has focused on larger urban areas. Dollar Tree is also seen as the best operator in the dollar store space, according to CNBC analyst Jim Cramer who said Family Dollar has been near the bottom and faces stiff competition from a better run Dollar General that overlaps its turf.

With the Dollar General deal basically off the table, Wall Street expects Family Dollar shareholders will approve the Dollar Tree offer, especially in light of a disappointing quarter reported Jan. 8.

Levine said comparable sales were up 1.8% in December but they were down 0.4% for the quarter. Net profits fell to 36 cents per share, down from 68 cents reported a year ago. Without the fees relating to proposed merger earnings per share would have been 44 cents.

“As expected, the first quarter of fiscal 2015 was very challenging, as we continued our transition from a very promotional merchandising strategy to a more everyday low price strategy. During the quarter, gross margin continued to be pressured by the impact of our pricing investments, as well as strong growth of lower-margin consumable categories, including food and tobacco. Our team did a good job of controlling expenses; however, ongoing topline challenges and continued margin pressures impacted our net profitability,” Levine noted in the recent earnings call. 

Levine said the company is focused on driving more profitable sales with less promotions and more even margins.

Family Dollar shares (NYSE: FDO) were down $1.08 on the news that the Dollar General deal is no longer feasible. Shares ended the day at $76.69, down $1.30. During the past 52 weeks the share price has ranged from a $80.97 high to a $55.64 low.