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Summary

  • DG has announced a bid for FDO topping DLTR's previous bid.
  • In a recent article I suggested buying DG.
  • Investors who bought DG should consider selling to lock in gains.

Dollar General (NYSE:DG) has announced a $8.95 billion, all cash, bid to buy Family Dollar (NYSE:FDO). The deal values FDO shares at $78.50 per share. This move comes just weeks after Dollar Tree (NASDAQ:DLTR) announced a deal to buy FDO for $74.50 per share. Since my initial piece, Family Dollar: Let The Bidding Begin, published June 8, 2014, shares of FDO are up more than 16%.

FDO ChartFDO data by YCharts

Dollar General Shares Surge

DG shares are trading sharply higher following news that it has offered to buy FDO. In my previous piece, Update: Dollar Tree To Buy Family Dollar, published July 28, 2014, I suggested that the best way to play DLTR's bid to buy FDO was to buy DG. DG shares are up more than 14%. During the same time, despite receiving a higher offer, FDO shares are up just 5.5%. My bullish argument was based on the idea that DG was poised to benefit from industry consolidation despite the fact that it was not involved, directly, in the consolidation. At the same time, I was skeptical that DLTR was a good trade because it had rallied sharply on news of the deal. Furthermore, large acquisitions have often proved difficult to execute operationally.

DG ChartDG data by YCharts

Take Gains In Dollar General

Due to the significant rally in DG based on news of its bid for FDO, I believe it is time for DG shareholders to lock in some gains. While it is not clear whether DLTR will come back with a higher offer for FDO, such a move is certainly possible and might prove problematic for DG. DG could be forced to increase its bid for or lose out on the deal altogether. It is difficult to envision anything that could send DG shares higher over the short to medium term.

Source: Update: Dollar General Tops Dollar Tree Bid For Family Dollar