Why a Family Dollar-Dollar General merger is like a McDonald’s-Burger King tie-up

Why a Family Dollar-Dollar General merger is like a McDonald’s-Burger King tie-up

Jonathan Ratner | June 12, 2014 | Last Updated: Jun 12 9:30 AM ET
Carl Icahn wants a merger between Family Dollar Stores Inc. and Dollar General Corp., but a tie-up may be like asking McDonald’s Corp. and Burger King Worldwide Inc. to join forces.

Mr. Icahn’s disclosure that he has acquired a 9.4% stake in Family Dollar sent the stock soaring this week. Investors anticipate that since another activist investor, Nelson Peltz, holds a significant stake, the discount retailer could be in play.

Most scenarios suggest Dollar General could create an accretive transaction while also keeping the chain from falling into a competitor’s hands, said RBC Capital Markets analyst Scot Ciccarelli. However, there are plenty of hurdles.

For one, Family Dollar and Dollar General are highly competitive, so it’s likely that the former’s board of directors does not want to sell.

Dollar General would also probably need to lever up its balance sheet, likely leading to a loss of its investment-grade rating.

Mr. Ciccarelli notes a merger carries high execution risk since a lot of synergies would be required to justify a deal versus the opportunity cost associated with an aggressive share buyback program.

“The company would also have to manage cultural difference and manage a very different real estate portfolio than what they’re accustomed to,” the analyst said, highlighting Family Dollar’s urban footprint and Dollar General’s historical focus on rural and suburban locations.

Despite these challenges, Mr. Ciccarelli raised his target prices on both companies (Dollar General to US$66 from US$63, and Family Dollar to US$62 from US$55) due to the higher possibility of a deal.

“While Family Dollar is surely frustrated with their own performance and may be more open to strategic alternatives than they were three years ago, Dollar General has had a chance for a long-term look at Family Dollar and has obviously chosen to avoid a transaction thus far,” he said.

Private-equity firms might consider buying Family Dollar, but the analyst noted they lack the same synergy opportunities, and the typical goal of cost reductions doesn’t appear to be what the company needs right now.

“As a result, while we believe that a deal is certainly possible (even logical) we are not convinced this combination is the ‘layup’, it was proposed to be earlier in the week,” Mr. Ciccarelli said.



About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (, a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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