In the end it wasn't even close. Family Dollar (NYSE:FDO.DL) shareholders overwhelmingly voted in favor of the $8.5 billion takeover offer made by smaller rival Dollar Tree (NASDAQ:DLTR), bringing to a close a high-stakes drama that played out over several months.
Left behind is the largest deep-discounting chain Dollar General (NYSE:DG), which, although it offered half a billion dollars more to buy Family Dollar than Dollar Tree did, could never overcome the belief that it would have to close far more stores to satisfy regulatory antitrust concerns than it would publicly admit.
With estimates running as high as 4,000 locations needing to be shuttered, compared to the 1,500 Dollar General insisted would satisfy regulators, 74% of Family Dollar's outstanding shares -- and 89% of total shares -- chose the sure-thing in Dollar Tree, which had demanded the takeover target hold a vote or see it walk away from the offer.
A bigger challenge lays ahead
The vote brings to a close the battle between the dollar store chains, but opens up a new front on what Dollar Tree investors can expect from their company.
Dollar Tree will leapfrog over Dollar General to become the biggest deep-discount retailer in North America, operating over 13,000 stores in 48 states and five Canadian provinces. The combined company will have sales of more than $18 billion and will employ more than 145,000 workers.
While Dollar Tree will keep its namesake store brand along with Deal$and Dollar Tree Canada, it will also maintain the Family Dollar brand as well. And that's where it becomes sticky for its investors.
Fitting a square peg in a round hole
Dollar Tree has largely been the only national pure-play dollar-store chain. Its Dollar Tree stores operate on a single price point while both Family Dollar and Dollar General had multiple price points. Although its Deal$chain offers multiple price points, there are only a couple hundred stores operating compared to the 5,400 or so Dollar Tree stores.
By bringing in Family Dollar's 8,000 stores, it dramatically tilts the scales and that has potential problems for Dollar Tree's profitability.
As CEO Bob Sasser noted when issuing his ultimatum to hold the merger vote, Family Dollar's business is faltering badly. It's been on a long downward slide and has regularly recorded less profitability than either Dollar Tree or Dollar General. And as Family Dollar's management team will stay on to run the business after the merger is completed, there doesn't seem to be any reason to expect a change in direction afterward.
Still an uncertain future
Other than awaiting antitrust approval, this is a done deal. Dollar Tree investors don't get a say in the matter because under Virginia law where Dollar Tree is incorporated (and Delaware, too, for that matter, where most other companies are incorporated), shareholders of acquiring companies are not required to have final approval over a deal. Once the boards of both companies approved the deal and Family Dollar's shareholders voted in favor of it, it becomes a matter of waiting out the regulatory hearings.
Both Dollar Tree and Family Dollar agreed to give the Federal Trade Commission four weeks notice before consummating the deal, which could make the closing of the merger happen as soon as March 2015.
While Dollar Tree has said the acquisition will extend its reach to lower-income customers while strengthening and diversifying its store footprint, it creates significant uncertainty for investors, including but not limited to:
- Can Dollar Tree effective integrate a failing business into its own successful operations?
- Can it blend different corporate cultures smoothly?
- What will happen to margins now that Family Dollar's less profitable operations are added in?
- Does the change from a flat-price business to a multi-price one upset what's been working best for Dollar Tree?
There are just too many questions that need to be answered for my taste, and though Dollar Tree had been my favorite dollar store chain, I can't support an investment in its stock now.