Family Dollar Shareholders Should Be Carl Icahn’s Biggest Fans

Icahn's pressure on Family Dollar could result in a number of different outcomes for shareholders, and some of them are more enticing than others.

Jul 12, 2014 at 1:45PM

Carl Icahn recently disclosed a 9.39% stake in Family Dollar (NYSE:FDO) and has subsequently pushed the company to put itself up for sale . He points to the company's perpetually underperforming financial metrics and the current market environment as reasons to sell immediately .

Shareholders must watch closely as Family Dollar's decision to sell or not sell will have drastic implications on the company's future and their own share value.

Carl Icahn's plea
In a letter to Family Dollar's CEO, Icahn cited flat same-store sales growth of 3% as a main problem with the company, especially compared to Dollar General (NYSE:DG) and Dollar Tree's (NASDAQ:DLTR) respective 4.4% and 3.1% growth last year. Additionally, Icahn pointed to revenue growth and operating margins,  areas where Family Dollar has consistently underperformed against its dollar store competitors since 2011. Icahn believes some type of change is necessary for the company to compete with other retailers.

FDO Operating Margin (TTM) Chart

FDO Operating Margin (TTM) data by YCharts

A Family Dollar – Dollar General merger
One change Family Dollar should consider is a public buyout. The most logical public buyer of Family Dollar is Dollar General. Credit Suisse reports Dollar General could pay between $90 and $100 per share -- well above Family Dollar's current price of $65.79. The premium Dollar General is willing to pay could stem from a desire to lure Family Dollar away from other public and private buyers.

Overall, analysts suggest a merger of the two companies could ultimately result in $550-$600 million in cost synergies . That comes out to between $0.70 and $0.76 in annual cost savings per share, considering 417 million shares outstanding.

Dollar General may see vast potential in a merger, which could create a dominant convenience-based retailer . This combination would dwarf the third dollar store competitor, Dollar Tree. Furthermore, Credit Suisse also sees an opportunity for Dollar General to move into its next phase—possibly further expansion or business differentiation--which might not be able to happen if it was solely reliant on internal opportunities .

In reality, there is significant potential for increased shareholder value and subsequently high shareholder returns if a Family Dollar-Dollar General merger goes through.

Going private
Conversely, a move to the private sector could free up Family Dollar's time and money to be spent working toward long-term goals. The transparency and short-term measuring stick in the public sector can drag on share price when expectations are not met, which is similar to the pressure Family Dollar is feeling in the face of its current underperformance. A move to the private sector might take pressure off Family Dollar while creating an opportunity to work for greater profitability instead of investor expectations.

Analysts see a bid from a consortium of private-equity firms as the most likely privatization route . While no formal bids have been offered, analysts see any privatization move as an easier path to the significant cost-cutting that Family Dollar must undergo in order to turn its recent underperformance around. In the end, shareholders could reap the profits of a lucrative buyout similar to what Dollar General might offer.

What the future holds for Family Dollar
A sale of Family Dollar is not imminent . Family Dollar's stock continued to rise in the past few years from $27.83 in 2010 to $64.33 today, which complicates the search for a buyer. Simply put, Family Dollar, despite its blemishes, may be too expensive to buy.

In terms of a public buyout by Dollar General, Dollar General does not seem to want to risk its current success on a merger with an underperforming business with little upside . The recent retirement announcement of Dollar General's CEO Rick Dreiling further pushes a Family Dollar-Dollar General merger into uncertainty. The upcoming transition period for Dollar General likely means a merger decision will indefinitely be put on hold.

Final thoughts
Some change seems necessary to turn around Family Dollar's chronic underperformance against competitors.

Privatization seems most likely, and may pay a lucrative share buyout. But it has the least upside. On the other hand, a public buyout could provide shareholders with hope for higher stock returns in the future.

Dollar General's hypothetical share buyout of $90-$100, plus the possibility of massive cost synergies and potential for growth, means a merger is the best hope for Family Dollar shareholders. While it does not seem likely, Family Dollar shareholders should hope Dollar General views the chance to merge with its biggest competitor as too good to pass up.

No matter the outcome, Family Dollar shareholders should be pleased with Icahn's plea for change. They will likely benefit as a result.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Jared Billings has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information