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Must-know: Carl Icahn cuts down stake in Family Dollar stores

Part 2
Must-know: Carl Icahn cuts down stake in Family Dollar stores (Part 2 of 5)

Family Dollar and Dollar Tree merger transaction details

Family Dollar and Dollar Tree merger transaction details

Activist investor Carl Icahn’s hedge fund Icahn Capital trimmed its stake in Family Dollar (FDO) stores last week after the deep-discount retailer agreed to a $8.5 billion merger with rival Dollar Tree (DLTR). In this part of the series, we ‘ll discuss the details of the transaction, which is valued at $74.50 per share—a 22.8% premium over the Family Dollar’s closing price on July 25, 2014.

FDO mergerEnlarge Graph

Details of the Family Dollar store and Dollar Tree merger transaction

  • The cash and stock transaction, which has been unanimously approved by the boards of both companies, is expected to close by early 2015, at which time the Family Dollar shareholders will receive $59.60 in cash and $14.90 equivalent in Dollar Tree shares.
  • The stock portion will be subject to a collar so that Family Dollar shareholders will receive 0.2484 Dollar Tree shares if the average Dollar Tree trading price during a specified period preceding closing is equal to or greater than $59.98 and 0.3036 Dollar Tree shares if this average trading price is less than or equal to $49.08. If the average trading price of Dollar Tree stock during this period is between $49.08 and $59.98, Family Dollar shareholders will receive a number of shares between 0.2484 and 0.3036 equal to $14.90 in value.
  • The transaction values Family Dollar at an enterprise value (or EV) of ~$9.2 billion, and it represents an enterprise value to last 12 months—May 31, 2014—earnings before interest, taxes, depreciation, and amortization (or EBITDA) multiple of 11.3x.
  • Dollar Tree intends to finance the acquisition through a combination of existing cash on hand, bank debt, and bonds. It has received a $9.45 billion financing commitment from JPMorgan Chase Bank, N.A. with the bank debt syndication and bond offering expected to occur before closing.
  • In case the merger agreement is terminated, Family Dollar will be required to pay Dollar Tree a cash termination fee of $305 million.

At closing, Family Dollar shareholders will own no less than 12.7% and no more than 15.1% of the outstanding common stock of Dollar Tree. Chairman and CEO of Family Dollar Howard R. Levine and Trian Fund Management, L.P. and funds managed by it, which collectively own ~16% of the outstanding stock of Family Dollar, have entered into voting agreements in support of the merger. The release further added that Levine will remain with Family Dollar and report directly to Dollar Tree CEO Bob Sasser.

After the deal is completed, Levine will become a member of the Dollar Tree Board of Directors. Sasser said the deal is “transformational,” adding that “We will continue to operate under the Dollar Tree, Deals, and Dollar Tree Canada brands, and when this transaction is complete, we will operate under the Family Dollar brand as well.”

Discount retailers such as Dollar General (DG), Family Dollar (FDO), and Dollar Tree (DLTR) are facing competition from big-box retailers such as Walmart (WMT) and Target (TGT), who are expanding with small-format stores as shoppers increasingly look for convenience. Both Walmart and Target are struggling with competition from discount retailers drugstores like CVS and Walgreens, and e-commerce giants such as Amazon (or AMZN). Family Dollar and its peers Dollar General and Dollar Tree are members of the State Street SPDR S&P Retail ETF (or XRT) and the SPDR Consumer Discretionary Select Sector Fund (or XLY).

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