Is the market ignoring Family Dollar Stores' (NYSE:FDO.DL) stock price risk? As unlikely as it seems, the target of a discount-retail bidding war between Dollar General (NYSE:DG) and Dollar Tree (NASDAQ:DLTR) could be ready to fall. In all likelihood, Family Dollar will be acquired by one of its rivals. However, there is a real risk that a deal will go through at a price below Family Dollar's current stock price. Although other factors could enhance the per-share value, investors should not count on that.
The lower bid prevails
Now that Dollar General has raised its offer from $78.50 per share, the highest bid for Family Dollar stands at $80. However, Family Dollar still does not seem open to Dollar General's entreaties. Instead, the company rejected both Dollar General's offers due to antitrust concerns and reaffirmed its commitment to merge with Dollar Tree for roughly $74.50 per share.
It turns out that Family Dollar's management may have an incentive to accept Dollar Tree's bid despite the lower compensation delivered to shareholders. Family Dollar's nominal reason for rejecting Dollar General's first offer was that the merger could fail to close as a result of regulatory action. However, cynics cite Dollar Tree's promise to give Family Dollar's CEO a meaningful role in the combined company as the real reason behind the rejection of the rival offer.
No deal to keep Family Dollar's management team in place has been disclosed in public filings surrounding Dollar General's bid, and such an offer seems unlikely due to the hostile nature of that takeover attempt. As a result, it's possible that Family Dollar will accept Dollar Tree's bid, which would send Family Dollar's stock down from a current price of about $79 per share to Dollar Tree's offer value of $74.50 per share.
No better bid is made
At $79 per share as of Monday afternoon, Family Dollar's stock trades just 1.25% lower than Dollar General's highest bid -- which was summarily rejected. It seems unlikely that a significantly higher bid is in the making. Family Dollar made no complaints about Dollar General's offer price -- only its ability to get the deal past regulators. Therefore, shareholders will likely receive no better than a 1.25% return sometime in the next several months. If Family Dollar accepts Dollar Tree's bid for $74.50 per share, shareholders buying in at today's price would experience a negative 5.7% return between now and when the merger goes through.
Deal falls apart
If Family Dollar is not acquired by either rival, its stock price could drop 25% to $60, where it traded before Dollar Tree's offer was announced. Two things could happen to make both potential deals fall apart: (1) regulators reject the deal due to antitrust concerns, or (2) unhappy investors reject Dollar Tree's offer after it is approved by the board.
The first event is likely to occur only if Family Dollar accepts a new offer from Dollar General. The combined company would add to Dollar General's lead as the largest discount retail chain in the U.S.; it would have nearly 20,000 stores, compared to Dollar Tree's 5,166 locations. As part of its revised offer that was rejected, Dollar General agreed to divest up to 1,500 stores, and to pay Family Dollar $500 million -- or $4.39 per Family Dollar share -- if regulators nix the deal. However, the compensation would not be enough to offset the $20 drop in stock price that Family Dollar could likely experience if the deal fell through. Therefore, Dollar General would need to substantially increase its reverse breakup fee in order to provide Family Dollar shareholders safety of principal.
As a result of antitrust and job security concerns, Family Dollar might choose Dollar Tree's offer. However, unhappy shareholders might vote against the deal since it is being done at a price below Dollar General's bid.
In either case, the stock is due for a big drop if both deals collapse.
Family Dollar will probably be acquired by one of its two rivals, but there's no guarantee that it will happen at a price that gives shareholders buying today a satisfactory return. In fact, Family Dollar's stock price is likely to fall unless a better bid comes through.