What started out as supposedly a friendly investment and friendly talks has quickly escalated into what appears to be a hostile takeover getting hostile. Billionaire activist investor Carl Icahn, an investor for what seems like five minutes so far in Family Dollar Stores (UNKNOWN:FDO.DL), had a few harsh and demanding words in a letter to the company, a copy of which was filed with the U.S. Securities and Exchange Commission on June 19.
Rewind a couple of weeks
Recall that in a filing back on June 6, Icahn revealed a 9.39% stake in Family Dollar Stores. A number of analysts suspected at the time that Icahn had his eyes set on a possible merger with Dollar General (NYSE:DG), as both companies have similar business models yet lots of duplicate overhead that could be eliminated. A merger could benefit both companies and their shareholders through reduced costs and increased profits.
Much of Icahn's position was accumulated through options with an April 2016 expiration. The reasons for the position cited in the filing include "the belief that [the shares] were undervalued" and that Icahn and crew see "great long term potential." Icahn then added a long list of successes that with his involvement helped to create value for shareholders of other companies.
Family Dollar Stores didn't exactly get on the horn with Dollar General right afterward. Instead, it gave a public response that it is open to talks with all shareholders as it works to improve the company's financial position. It then adopted a shareholder-rights plan, called a poison pill, that essentially stops Icahn from accumulating more shares -- and votes -- as an anti hostile-takeover measure. Icahn immediately took offense. And now things seem to be getting ugly.
Icahn prepares for battle
In the June 19 filing is a letter from Icahn to Howard Levine, CEO of Family Dollar Stores. He began by commenting that he and Levine have a "strong difference of opinion as to the future of our company." He then went on to list Family Dollar Stores' reported financial failures and basically demanded management shift strategies, immediately.
Revenue, same-store sales, sales per store, sales per square foot, the profit margin, return on capital, and even stock price returns were all cited as underperforming its peers (which implies including Dollar General, of course). He then said in bold and underlined for emphasis, "[I]t is imperative that Family Dollar be put up for sale immediately."
He then mentioned that selling the company could lead to "massive synergies." This is most likely with Dollar General, though I suppose Dollar Tree, Wal-Mart, or others could be in mind; but Dollar General is the most obvious. He then continued to urge a sale "now" and said the "overwhelming majority" of shareholders would support it. He then accused Levine and Family Dollar Stores of "continued passivity" on a company "in limbo for far too long."
Icahn further insisted on being allowed to seat three of his representatives to join the board of directors, and stressed that the company should waste no time. He threatened that If Family Dollar Stores doesn't yield to his demands, he will go straight to the shareholders to have the entire board of directors replaced. The implication here is that upper management, including Levine, would be next on the chopping block.
If you like to gamble a bit, this could be an interesting idea. Icahn will win and the shareholders will gain value through a Dollar General (or other) merger, or he will lose, but the rattling of the cage has got to be scaring the daylights out of management. That should at least be good for motivating them just a little more to get the company back in better shape for the long term. And even if Icahn loses, he may even be successful at helping management restructure and strategize a little better. Either way, grab your popcorn. The show promises to be exciting.