Dollar Tree (NASDAQ:DLTR) stock was pummeled in November after its earnings report resulted in the deep discounter reducing its sales outlook for the third consecutive quarter and lowering its profit forecast.
Shares trade at the same level now as they did a year ago, meaning investors have seen no benefit despite all the restructuring going on at the Family Dollar chain. So when private equity firm TRC Capital offered to buy their shares in a mini-tender offer last month, investors might be tempted to leap at the chance of unloading their stock and getting out of a company that looks like it's going nowhere fast.
They should reconsider their position.
Not all tender offers are equal
Mini-tender offers are not the same thing as tender offers, which many investors are likely more familiar with. In those cases, an investor or another company offers to buy an investor's shares, often at a premium, in order to take control of it or influence the direction it's taking. They are inviting investors to "tender," or sell their shares to them.
Last month, for example, Merck (NYSE:MRK) launched a tender offer for ArQule (NASDAQ:ARQL), offering to buy the company for $20 a share, or double the price ArQule was trading at before the tender was made.
That's not what is happening at Dollar Tree, and investors would do well to reject the offer.
Five top reasons to oppose the offer
Unlike Merck and ArQule, TRC Capital isn't looking to acquire Dollar Tree, but rather wants to buy 1.5 million shares of the discounter's stock. A mini-tender offer is an effort to acquire less than 5% of a company's stock. Based on the 237.5 million shares outstanding at the end of the third quarter, TRC is looking to buy a measly 0.006% of the company. It's a sizable position TRC wants to have, to be sure, but it won't be able to direct or control where Dollar Tree is going.
Moreover, it wants to buy the stock at a discount. TRC offered to purchase Dollar Tree's stock from investors for $89.88 each, or 4.4% below where the retailer's stock was trading before the mini-tender offer was made. Even though the stock has declined slightly since then, investors could still get more for their shares on the open market instead of selling to TRC.
Mini-tender offers are something investors should generally dismiss out of hand if they receive one. Even though Dollar Tree says it's neutral on the offer, here are five reasons why investors should reject it:
- It undervalues Dollar Tree's stock
- Investors face numerous pitfalls in tendering their shares
- The SEC urges caution about participating in them
- They prey on new or uninformed investors
- It's a way for a buyer to make a quick buck
Only one side wins
As noted before, TRC is offering to buy Dollar Tree's stock for less than what it's trading at on the open market, so for that reason alone, investors should ignore the offer. But they're also largely unregulated, and once investors agree to participate in one, they cannot withdraw.
Regular tender offers have strict SEC rules to follow, yet so long as the buyer doesn't outright lie, they typically fly under the regulatory agency's oversight.
The SEC even warns that mini-tender offers "have been increasingly used to catch investors off guard" and reiterates that none of the protections investors have with regular tender offers exist with mini-tender offers.
TRC Capital could also make a quick buck if it acquired all the shares it wanted to and then immediately turned around and sold them. But it's also just as likely the PE firm sees a good chance Dollar Tree's stock is a good value and will go up, and by acquiring shares at a discount, it can make even a bigger profit later on.
A surprise in the making?
A lot of Dollar Tree's more cautious sales and earnings guidance for the fourth quarter and full year were predicated on the next round of tariffs being imposed on Chinese-made goods, but with the lull in tensions as the two sides prepare to sign new trade agreements, the deep discounter could end up surprising Wall Street when it reports its results.
With much of the bad news already baked into Dollar Tree's stock price, this mini-tender offer presents TRC Capital with a chance to make a decent profit if it hangs onto whatever shares it gains.