How many activists does it take to get Family Dollar Stores Inc. (FDO:US) sold?
Family Dollar shares surged 12 percent this week after the underperforming retailer attracted the attention of yet another activist investor, billionaire Carl Icahn. Nelson Peltz’s fund, already one of the biggest owners, urged Family Dollar to sell itself in 2011, though the company rejected his overture and no other bidders surfaced. Including John Paulson, there are now three influential investors in the stock, renewing the potential for a deal or management shakeup, Wedbush Inc. said.
“You’ve got three activist firms involved with pretty significant shareholdings,” Joan Storms, a Los Angeles-based analyst at Wedbush, said in a phone interview. “This definitely increases the prospects of the company getting sold. The board is going to be under a lot more pressure to look at some of their options.”
Given the languishing share price before Icahn stepped in, it’s going to be tougher for Family Dollar to rebuff a deal this time around, according to MKM Partners LLC. The challenge is still finding a suitor. While Dollar General Corp. (DG:US) -- the $7.7 billion company’s closest competitor -- hasn’t shown an interest in merging, Jefferies Group LLC sees it as a possibility that would result in about $1 billion of synergies.
Dan MacDonald, a spokesman for Goodlettsville, Tennessee-based Dollar General, said the company doesn’t comment on speculation.
A representative for Family Dollar declined to comment beyond the Matthews, North Carolina-based company’s June 6 press release, which said the retailer is “open to dialogue with all shareholders and welcomes input toward the shared goal of enhancing value.” Family Dollar also said it is taking steps to increase efficiencies and improve financial performance. Chairman and Chief Executive Officer Howard Levine has an 8.2 percent stake in the company, which his father founded.
Peltz’s Trian Fund Management LP owns 7.4 percent of Family Dollar, and Paulson & Co. has a 5.7 percent passive stake, according to data (FDO:US) compiled by Bloomberg.
Icahn Enterprises LP (IEP:US) disclosed June 6 that it bought Family Dollar stock and options representing a 9.4 percent stake. The retailer’s predicament is similar to his former targets such as Chesapeake Energy Corp., Biogen Idec Inc. and Forest Laboratories Inc., Icahn said in the filing. At those companies, he prompted changes to management.
“We think a sale of Family Dollar will figure prominently in the discussions,” Patrick McKeever, an analyst at MKM, wrote in a report June 9. “Given Family Dollar’s significant underperformance relative to its dollar store peers, its languishing stock price and the greater activist interest, the company is likely to have a tougher time defending itself today.”
Last month, as Icahn was quietly amassing his position, Family Dollar’s price-sales ratio dropped to 0.62, the lowest since 2010, as takeover speculation faded, according to data compiled by Bloomberg.
Family Dollar’s 13 percent gain (FDO:US) June 9 was the biggest one-day increase since Feb. 16, 2011, the day Peltz offered to buy the company for up to $60 a share. It rejected the bid and then agreed to let Edward Garden, chief investment officer of Trian, join the board. Garden is the only director who voted against the poison pill that Family Dollar adopted this week, which limits an investor from accumulating more than a 10 percent stake.
Representatives for Icahn, Trian and Paulson & Co., all based in New York, declined to comment.
MKM’s McKeever estimates Family Dollar could be valued from $69 to $83 a share this time, based on the valuation KKR & Co. paid to take Dollar General private in 2007. That implies at least a 19 percent premium to Family Dollar’s average price in the 20 trading days leading up to Icahn’s filing. The stock closed at $68.05 yesterday.
The same question from 2011 remains: Who’s going to buy it? Analysts said at the time that Peltz’s offer could spur interest from Dollar General. Three years have passed and Dollar General never made a bid, at least not publicly.
A tie-up of the two retailers still makes sense, according to Daniel Binder, a New York-based analyst at Jefferies, who recommends (FDO:US) investors buy both stocks because of the potential for a deal. Dollar General, valued (DG:US) at $19 billion yesterday, is more than twice the size of Family Dollar, generates more revenue (DG:US) per square foot and earns a larger profit (DG:US) from each dollar of sales, according to data compiled by Bloomberg.
Binder estimates $950 million to $1.2 billion of synergies. Even before accounting for those savings, the deal would boost Dollar General’s earnings beginning this year, data compiled by Bloomberg show.
Wal-Mart Stores Inc. (WMT:US), whose new smaller-format stores are outperforming its supercenters, is another possible suitor, said Michael Exstein, a New York-based analyst at Credit Suisse Group AG, in a February report. The world’s largest retailer has the least overlap in store locations with Family Dollar, versus Dollar General and Dollar Tree Inc., he said.
“Acquiring Family Dollar could be the most logical way for Wal-Mart to significantly jumpstart the small-store effort,” Exstein wrote, adding that a deal would be “immediately accretive” if it paid $76 to $82 a share.
David Tovar, a spokesman for Bentonville, Arkansas-based Wal-Mart, declined to comment on whether the company is interested in buying Family Dollar.
Storms of Wedbush said she sees a “private non-strategic transaction” to be more likely than a sale to Dollar General or Wal-Mart. Dollar General is committed to what it sees as a less risky strategy of growing organically, while Family Dollar’s revenue would be “a drop in the bucket” for Wal-Mart, she said. Family Dollar had $10.4 billion of sales in its latest fiscal year, 2 percent of what Wal-Mart generated, data compiled by Bloomberg show.
Private-equity firms usually target retailers that need help slashing costs rather than boosting revenue, so they may not be interested in Family Dollar, Laura Champine, a New York-based analyst at Canaccord Genuity Corp., said in a phone interview.
Still, the chances of something happening have increased, said Champine, who estimates that in the absence of a deal Family Dollar shares may fall to about $50 apiece.
“We’ve seen this movie before with Trian having come in,” she said. With the addition of Icahn, “the activists who are involved have a lot of firepower. Either there’s a takeout -- and we would think it would be a strategic buyer -- or the company stays a stand-alone public company in which case it will take some time to earn the valuation (FDO:US) it’s seeing in the market today.”
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