Bloomberg News

Shorts Spurn Family Dollar as Buyout Expectations Loom: Real M&A

April 13, 2014

A Family Dollar Stores Inc. Location Stands in Mansfield

Family Dollar has been buoyed by takeover speculation since Peltz made an unsolicited bid in 2011 in an attempt to attract other suitors. Photographer: Ben Torres/Bloomberg

Family Dollar Stores Inc. (FDO:US) is still in play, if short sellers (FDO:US) are any guide.

While the $6.4 billion retailer hasn’t had much good news (FDO:US) for shareholders lately, bets against the stock reached a record low last week, according to Markit data compiled by Bloomberg. That’s because investors are expecting an acquirer or activist to swoop in, said Wedbush Inc. It also helps that the hedge funds run by billionaires Nelson Peltz and John Paulson are two of the three biggest investors, and Peltz’s firm has a seat on the board.

Family Dollar has been buoyed (FDO:US) by takeover speculation since Peltz made an unsolicited bid in 2011 in an attempt to attract other suitors. None surfaced. Chief Executive Officer Howard Levine was also reluctant to sell the company his father founded. Since then, competition has increased and Family Dollar said last week it will conduct a business review as analysts predict a 14 percent drop (FDO:US) in 2014 profit. Pressure is building on Levine, and there’s still a chance buyout firms will step in or shareholder activism will pick up, Edward Jones & Co. said.

“The ice has got to be getting thinner underneath his skate,” Brian Yarbrough, a St. Louis-based analyst at Edward Jones, said in a phone interview. “A lot of times you’ll see private equity take an interest in some of these broken businesses, so you can’t rule it out.”

Bryn Winburn, a spokeswoman for Family Dollar, said the company doesn’t comment on market speculation, when asked whether it has been approached by buyers or is weighing a sale. Armel Leslie, a spokesman for Paulson & Co. who works at WalekPeppercomm, declined to comment. A representative for Peltz’s Trian Fund Management LP also declined to comment.

Big-Box Competition

Family Dollar is contending with stiffer competition from rival discount chains, drugstores and big-box retailers such as Target Corp. (TGT:US) and Wal-Mart Stores Inc. (WMT:US) The Matthews, North Carolina-based company said last week that it will shutter about 370 stores and open fewer new ones, as well as lower prices on about 1,000 items as it conducts a review to improve its business.

The stock fell (FDO:US) 14 percent so far this year, the sixth-worst return among 31 retailers in the Standard & Poor’s 500 Index. Almost none of the analysts covering Family Dollar recommend (FDO:US) buying it. About 68 percent suggest holding it, and 25 percent say to sell.

The company traded at 0.62 times (FDO:US) its sales last week, the lowest ratio since 2010, data compiled by Bloomberg show.

Shorts Out

Short sellers have backed away this year. These types of traders bet on stock declines by selling borrowed shares and then buying them back more cheaply to pocket the difference in price. The portion of Family Dollar’s shares sold short fell to an all-time low 0.31 percent on April 7, according to data compiled by Markit (FDO:US) that goes back to 2006. By comparison, the average S&P 500 company has about 2.1 percent of its shares sold short, the data show.

“From a fundamental perspective it should probably be a sell rating, but you can’t short the stock because it’s in play,” Joan Storms, an analyst at Wedbush in Los Angeles, said in a phone interview. She cut her 12-month price target to $54 from $60 last week and has a neutral rating on the stock. The stock closed (FDO:US) at $56.10 last week.

Similarly, Wolfe Research LLC’s Scott Mushkin estimates Family Dollar should be valued at $50 a share if it remains a stand-alone company. Should acquirers such as Dollar General Corp. (DG:US) emerge and offer a 15 percent to 20 percent premium, that would imply as much as $70 a share in a takeout, the New York-based analyst wrote in an April 11 report.

Higher Likelihood

“A buyout bid lingers,” Mushkin wrote. “The recent poor operating performance increases the likelihood of M&A activity” and Dollar General may be compelled to “take a hard look.”

Dan MacDonald, a spokesman for Dollar General, didn’t return a phone call requesting comment.

Dollar General, one of Family Dollar’s closest rivals, has itself been a takeover target. KKR & Co. took the Goodlettsville, Tennessee-based chain private in 2007 for about $6.9 billion, not including net debt. It went public again in 2009 and last week had a market value of $17 billion, more than double that of Family Dollar.

No LBO

While that takeout provides a precedent for any private-equity firms looking at Family Dollar, the company may not be as attractive of a candidate for a leveraged buyout, according to Anthony Chukumba, a New York-based analyst at BB&T Corp.

Dollar General “was a home run deal for KKR,” Chukumba said in a phone interview. And since Peltz put Family Dollar in play in 2011, “the fundamentals (FDO:US) have actually gotten worse, which I think would make it a little bit tougher for a private-equity firm to finance, as well as make them a little bit more wary. I really don’t see an LBO.”

Still, bids from private-equity firms can’t be ruled out if Levine isn’t able to turn the business around, said Yarbrough of Edward Jones and Joe Feldman, an analyst at Telsey Advisory Group in New York.

“That’s still the most plausible story in my mind, where if private-equity guys took it private, they could make more aggressive changes that the public markets wouldn’t be so forgiving of,” Feldman said in a phone interview. “They could try to streamline the business, enhance it, improve it, then come public again.”

CEO Blockade

He cautioned that a deal may not be likely because Levine hasn’t been a willing seller. The CEO snubbed the offer from Peltz’s Trian for $55 to $60 a share, saying the board determined it substantially undervalued the company. The bid was viewed as an effort by Peltz to put Family Dollar on the block for buyout firms.

Trian -- whose chief investment officer Edward Garden has a seat on the board -- owned 7.4 percent of Family Dollar as of January, making it the third-largest shareholder (FDO:US), data compiled by Bloomberg show. Paulson’s hedge fund was the largest holder, with an 8.6 percent stake as of December.

“The shareholder activists could get a little bit louder here if things continue to deteriorate at the same pace they have been over the last four or five quarters,” Yarbrough said.

To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editors responsible for this story: Beth Williams at bewilliams@bloomberg.net Whitney Kisling


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Companies Mentioned

  • FDO
    (Family Dollar Stores Inc)
    • $77.82 USD
    • 0.07
    • 0.09%
  • TGT
    (Target Corp)
    • $61.78 USD
    • 0.89
    • 1.44%
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