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Dollar Tree Closes Family Dollar Buyout: What's in Store? - Analyst Blog

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The wait is finally over! After struggling for almost a year, Dollar Tree, Inc. DLTR successfully concluded the acquisition of Family Dollar Stores Inc. (FDO) yesterday.  Per the deal, for each Family Dollar share, its stockholders will receive cash worth $59.60 and 0.2484 of a share of Dollar Tree.

The giant arising from the combination of these two companies will be strong enough to single-handedly counter competition from retail bellwethers such as Wal-Mart Stores Inc. WMT and Dollar General Corporation DG, in the dollar-discount store segment.

Since revealing its intention to acquire North Carolina-based Family Dollar in Jul 2014, the ride has not been smooth for Dollar Tree. The company, which was desperately seeking the Federal Trade Commission’s (“FTC”) clearance, also battled a bidding war with Dollar General to win this deal.

In fact, to get the FTC’s approval, Dollar Tree recently penned a deal with Sycamore Partners, to sell to the latter 330 Family Dollar stores upon completing its buyout. This is because the FTC required the combined company to shed stores, as the massive store count of the combined entity could dominate in various regions.

Consequently, the merged firm will now operate over 13,000 stores across 48 states and 5 provinces in Canada, with combined annual sales of over $19 billion. This buyout, which will facilitate Dollar Tree to emerge as a leading discount retailer in North America, will also assist in providing customers with products at a fixed price ($1 or less) under its banner and multi-price point under Family Dollar.

Moreover, the acquisition will enhance the buying power of the pair, providing better negotiating terms against suppliers. The combined company will also be able to offer broader and multiple assortments at more compelling prices. Additionally, the companies will be able to tap new markets, enhance market share in existing ones, extend the sales channel, and generate significant free cash flow to increase store count and repay debt.

Notably, the transaction will help in achieving operational and distribution efficiencies as well as cost synergies, as the company is anticipated to generate annual cost savings of about $300 million by the end of the third year of the deal.

As for Family Dollar, the company has been in troubled waters for some time now, which is evident from its average negative earnings surprise of nearly 9.8% over the past four quarters. The tepid economic recovery and heightened competition from other big brick-and-mortar retailers along with online giants have affected its profitability. We believe that the aforementioned deal could provide a much-needed breather to the company.

Alongside, Dollar Tree also announced several management changes. The company named Gary Philbin as President and Chief Operating Officer of Family Dollar. Philbin, who was serving Dollar Tree as President, will assume his new role immediately. Further, the company announced Family Dollar’s Chief Executive Officer, Howard R. Levine’s immediate appointment to Dollar Tree’s board.

The dedication and solid experience of these able leaders are likely to assist the company through this transformational phase by supporting a successful integration.

While some analysts are of the view that Family Dollar’s takeover bodes well for Dollar Tree, some analysts remain skeptical as they expect a sloppy integration of the two companies. Hence, we would like to wait and see what’s in store for this Zacks Rank #3 (Hold) company.

A better-ranked stock in the retail-discount industry includes Gordmans Stores, Inc. GMAN carrying a Zacks Rank #1 (Strong Buy).

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