By Paul Ziobro and Anna Prior
Dollar Tree Inc. said it would buy rival Family Dollar for about
$8.5 billion amid an intensifying battle for America's poorest
consumers.
The two companies have put pressure on discounting giant
Wal-Mart Stores Inc. with their more manageable smaller stores and
frequently lower prices. But they themselves have been pressured by
slowing sales growth as low-income shoppers struggle to recover
from the recession.
A deal between the two dollar stores would create a 13,000 store
company with the scale to command better prices from suppliers and
opportunities to cut costs by rejiggering store fleets and reducing
overhead. It also would help Dollar Tree get into more urban
markets and have the flexibility to sell a broader range of
prices.
The combined company would have more than $18 billion in sales
and be a much more formidable competitor to larger rival Dollar
General, as well as to big box chains like Wal-Mart and Target
Corp., which are moving into dollar store territory with smaller
store formats.
While the two companies share Dollar in their names, they follow
quite different strategies. Dollar Tree actually sells all items
for a dollar or less and focuses on suburban markets. Family
Dollar, meanwhile, sells goods at a range of discounted prices and
targets the urban and rural poor.
The company plans to maintain each brand. Dollar Tree Chief
Executive Bob Sasser, who will lead the combined entity, stressed
that the two chains don't have too much overlap. Executives said
they don't plan on closing stores but may turn some Family Dollar
stores into Dollar Trees, or vice versa, where the existing stores
are underperforming.
"Industry trends and outlook are positive for the combined
businesses with low and middle income customers continuing to look
for ways to balance their budgets and stretch their dollars," Mr.
Sasser said.
The dollar store category of stores has thrived since the
recession, as shoppers sought ways to save money and make quicker
trips than were possible at giant Wal-Mart stores. Family Dollar,
however, stumbled with a strategy to raise some prices offset by
targeted deep discounts.
In January, Family Dollar reversed course by cutting prices on
nearly 1,000 items. It also planned to close 370 stores this year
and slow down new-store openings.
The chain's struggles caught the attention of activist investor
Carl Icahn, who last month mounted a public campaign for the
company to put itself up for sales. The billionaire also criticized
Family Dollar's chairman and chief executive, Howard Levine, for
poor managerial decisions. Mr. Icahn called for ousting Family
Dollar's board and strongly argued that the larger and better-run
discounter Dollar General should buy the company.
Instead, it was Dollar Tree, a chain that sells thousands of
household supplies and other tchotchkes for $1 or less, that
swooped in. Dollar Tree's Mr. Sasser said the two sides have been
working on the deal for "several months."
Mr. Levine, whose father, Leon, opened the first Family Dollar
in 1959, will remain with the combined company, reporting to Mr.
Sasser, and join the board.
The purchase price of $74.50 a share is a 23% premium to Family
Dollar's closing stock price Friday. Mr. Levine and Nelson Peltz's
Trian Fund Management LP, who together own 16% of Family Dollar
shares, both said they would vote in favor of the deal. The closing
is scheduled for early 2015.
Mr. Icahn wasn't immediately available for comment. Trian, which
has had a representative on Family Dollar's board since 2001, said
the deal would make the company part of a stronger
organization.
Shares in Family Dollar rose 23% to $74.56 in midday trading.
Dollar Tree's shares gained 3.4% to $56.05. The companies expect to
save about $300 million a year as a result of the deal, largely
through better buying power and consolidation of their distribution
networks.
Write to Paul Ziobro at Paul.Ziobro@wsj.com and Anna Prior at
anna.prior@wsj.com
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