Yesterday's third-quarter earnings report from Memphis-based general merchandiser Fred's (NASDAQ:FRED) included an early Christmas present for investors.

Alongside the typical financial news -- reflecting the current tough retail environment -- the company announced that Merrill Lynch & Co. (NYSE:MER) is reviewing "strategic and financial options," which apparently include multiple inquiries about buying the company.

Buyout speculation has pushed Fred's price up nearly 16% since that press release, and they now trade at 15 times estimated earnings per share of $0.69 for fiscal 2008, which closes in February. Otherwise, it was business as usual, which might be why the company is interested in a buyout.

While Fred's eked out a 1.1% increase in same-store sales along with a 2.9% improvement in total revenue, margins were hurt by considerably higher expenses. Notably, selling, general, and administrative expenses grew 6.8% and interest expense rose 23.0%.

Fred's has struggled since 2004 with flat-line earnings and cash flow, although revenue has grown around 10% each of the last three years. Hard to believe that in October 2003, this retailer's shares traded at more than $35 and earnings per share were growing 30% per year.

With those days clearly behind them for now, it's no surprise to see Fred's with only a one-star rating from the CAPS community. Of course, rivals Big Lots (NYSE:BIG) and Family Dollar (NYSE:FDO) aren't faring well either, sporting one and two stars, respectively.

From the sound of things, a buyout is all but certain. Fred's is a simple company, so there shouldn't be any surprises in store (no pun intended). Shareholders probably stand to gain a little more on the buyout premium, when the official announcement is made.

But if you don't want to risk the possibility of no deal happening, this would be the time to take the money and run.

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Fool contributor Jason Ramage owns nary a share of any company mentioned in this article. Your comments are always welcome. The Fool has a disclosure policy.