Dollar Tree To Acquire Family Dollar: Transaction Overview

| About: Dollar Tree, (DLTR)


Dollar Tree announced plans to acquire Family Dollar in a cash/stock transaction for $74.50 per share.

This merger would create a company with over 13,000 stores and $18 billion in sales.

Strong synergies will allow the two to compete in a depressed spending atmosphere.


Recently, both DLTR and FDO have faced pricing competition from Wal-Mart, which has a larger customer base, and prices that make it hard for competitors to compete. However, Wal-Mart is no exception to the slowing sales in the industry as a result of lower consumer spending by lower income families. As such, these companies are pursuing all opportunities to maintain their financial positions in this post-recessionary climate.

Key Facts:

Dollar Tree to Buy Family Dollar:

Dollar Tree (NASDAQ:DLTR) announced it has entered into a definitive agreement to acquire Family Dollar for $74.50 per share, which represents a 23% premium over FDO's closing price as of July 25, 2014. The transaction consists of $59.60 in cash and $14.90 in DLTR shares. This transaction values Family Dollar at an Enterprise Value of 9.2 billion which represents an EBITDA multiple of 11.3x. Per the deal press release, the transaction is expected to close in early 2015. Dollar Tree intends to finance the deal through a combination of existing cash, bank debt, and bonds.

The New Dollar Tree:

The proposed acquisition would create a discount retailer with over 13,000 stores and $18 billion in sales. Under the proposed transaction, Dollar Tree will continue to operate the Family Dollar brand along with its existing Dollar Tree, Deal$, and Dollar Tree Canada brands. We note that within DLTR's core store format, which represents the majority of its base, the company sticks to a fixed $1 price point. The proposed acquisition will grow DLTR's presence within the multi-price point format.

Synergies between DLTR and FDO:

DLTR believes this transaction will diversify its offering and customer base, with DLTR typically targeting customers across Middle America primarily in suburban locations, compared to Family Dollar targeting low and lower-middle income households in urban and rural locations. $300 million in synergies, expected by the end of the third year post-closing, to be generated from efficiencies in sourcing, SG&A leverage, and various operational optimizations. DLTR expects the deal to be accretive to EPS within the first year post-closing.

My Thoughts:

It is no doubt to me that the combination of Family Dollar and Dollar Tree will provide strong synergies that will allow the two to compete on price with companies like Wal-Mart. I believe Dollar Tree will experience strong bullish price movements in the months to come as more potential buyers flock into this stock, as they see the value and potential of such synergies. Dollar Tree already estimated $300 million of annual synergies by the third year post-close. Not only will increased revenues be seen, but the retailer will now be able to compete on price attracting a greater market share away from bigger retailers like Wal-Mart. Overall, I am interested to see the results of this merger play out, as this stock definitely has strong long-term potential.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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