Dollar General Corporation (DG) stock soars after an announcement to buy Family Dollar Stores Inc. (FDO) for $9.7 billion, or $78.50 per share. This announcement comes after a recently-announced attempted acquisition of Family Dollar by Dollar Tree (DLTR) late July worth about $8.5 billion or $74.50 per share, about $4 lower per share than Dollar General’s offer. Dollar General is also willing to pay the $305 million break-up fee that would be owed to Dollar Tree if the deal was broken off.
Following the announcement, shares of Dollar General were up 11.6% in pre-market trading at $64.10 and the stock is currently trading at $63.30. Family Dollar shares were up 4.9% to $79.75, currently trading at $79.89 and Dollar Tree shares were down 1.5% to 54.80, currently at $54.60.
“For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares,” said Dollar General CEO Rick Dreiling in a statement.
“For Dollar General shareholders, the proposed combination of Dollar General and Family Dollar would be a significant strategic opportunity to create immediate and lasting shareholder value. For both Dollar General and Family Dollar customers, we would be able to provide better value and greater selection.”
The combined company would have close to 20,000 stores in 46 states. Dollar General says it expects revenue to hit $28 billion and for the deal to generate synergies of $550 million to $600 million on an annual rate three years after the deal closes. Dollar General’s proposal would create the nation’s largest small-box discount retailer.
In contrast to the Dollar Tree and Family Dollar merger, the 4,900 stores of Dollar Tree would generate $7.84 billion in annual sales with combined sales of roughly $18 billion.
Dollar General Corporation has a Zacks Rank #4(Sell) due to sluggish earnings last quarter, and weakness in earnings estimate revisions as of late. If this merger does follow though, Dollar General will increase sales to $28 billion hoping to increase EPS and correcting the less than expected earnings report from last quarter.
The company has only had an average earnings surprise of positive 1.85%, while EPS growth for this year is expected to come in just below 10%. Additionally, it should be noted that Dollar General is categorized as being in the retail-discount industry which has an industry rank in the bottom 22% of all industries.
It is still unclear whether or not the acquisition will follow through, but if this marriage between Dollar General and Family Dollar occurs, the small-box discount retail industry will have a new behemoth running the show. Hopefully, for DG this will boost its competitive position and allow the company’s earnings picture to improve, possibly pushing DG out of ‘sell’ territory in the near future.
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