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
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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