Carl Icahn recently disclosed a 9.4% stake in Family Dollar (NYSE:FDO), which makes Icahn FDO's largest shareholder. Of course, due to Icahn's status, and track record as arguably the greatest activist investor, shares surged higher following the news. Icahn's FDO position is especially noteworthy given its size. With a 9% interest in the company, Icahn will be able to have a significant impact.
Other Noteworthy Shareholders
Carl Icahn is not the only noteworthy investor in FDO. With a 7.35% ownership interest, FDO's second largest shareholder is Nelson Peltz's Trian Fund Management. John Paulson's Paulson & Co is FDO's fourth largest shareholder, with a 5.68% ownership interest. Combined, these three activist investors control just over 22% of FDO. This ownership group makes for an interesting situation, as these players have the option to work together and make a joint bid for FDO or oppose each other with separate bids for the company or oppose a buyout altogether. In my opinion, it is highly unlikely that all three activist investors want to keep FDO public. In other words, at least one of the activist investors will push for a sale to another buyer or a leveraged buyout led by their own firm.
Trian's Previous Takeover Attempt
In early 2011, Peltz's Trian Fund Management offered to buy FDO for between $55 and $60 per share. FDO rejected the bid and put into place a poison pill limiting ownership to 10% for twelve months following the bid. Right now, given the mid $60s share price following news of Icahn's stake, it looks like management made the right decision by not selling the company to Peltz in 2011. There are a number of reasons why FDO has been considered a good buyout target. Perhaps most importantly, investors such at Peltz, Icahn, and Paulson all clearly believe that FDO is cheap. Based on FDO's PE ratio of about 17, the company does not appear to be significantly undervalued. However, there are a number of other factors that make FDO an attractive takeover target. Firstly, FDO has just $800 million in debt. This means there is considerable room for a buyer to issue debt to fund a buyout. Secondly, due to the nature of FDO's business, earnings are very stable, and even an economic downturn would not be too problematic. Finally, FDO has struggled to meet earnings expectations of late, which indicates that there is room for managerial improvement if the company is taken private.
Dollar General Could Buy Family Dollar
Perhaps the party that has the most to gain from a bid for FDO is its larger rival Dollar General (NYSE:DG). In the past, strong arguments have been made for why Dollar General should acquire FDO. The main points of the argument are that the combined company would benefit from cost synergies, reduced competition for new store locations, and reduced pricing competition. All of these points make sense to me. Additionally, Wal-Mart (NYSE:WMT) has become an increasingly bigger threat to dollar stores, as the company continues to open more of its smaller store formats. For this reason alone, I believe the case for consolidation amongst dollar store operates is stronger than ever.
New Takeover Attempt Is Likely
The combination of the poison pill expiring and Icahn's new stake has, in my view, made a takeover attempt extremely likely. I would not be surprised to see Icahn and Peltz make a joint bid for the company or launch separate efforts to take the company private. At the same time, I believe Dollar General is also poised to make a bid and is in the position to make the strongest bid due to the gains that might be available from a combined entity.
Carl Icahn's new stake may be just the catalyst needed to get the bidding war started for FDO. FDO's previous all-time high was around $75 per share, and I expect any offer for FDO to surpass this level. Ultimately, I would not be surprised to see an offer emerge that values the company at more than $80 per share. While FDO shares have already moved higher in reaction to Icahn's stake, I do not believe it is too late for investors to buy FDO.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.