It didn’t take a genius to see this coming: As expected, Dollar General (DG) made a bid for Family Dollar (FDO) to keep it out of the hands of Dollar Tree (DLTR), setting up a potential bidding war between DG and DLTR.
There was little chance Dollar General was just going to sit on the sidelines while its two biggest competitors joined forces. As soon as the news broke last month that Dollar Tree offered $8.5 billion for FDO, the market turned to Dollar General in expectation of a bid.
Dollar General did not disappoint, outbidding Dollar Tree with an offer of $8.95 billion. It sure sounds like a better deal, but it’s not so high that DLTR couldn’t make a counter offer. Anyone holding FDO stock has to be happy with this.
And anyone holding Dollar Tree stock has to be worried. DLTR is the smallest of the three big dollar store chains. Dollar General is the largest. If Family Dollar went to Dollar General, the resulting company would have about 20,000 stores in 46 states, with sales of more than $28 billion.
A Dollar Tree tie up with Family Dollar would be more formidable, but it would still have combined sales of only $18 billion. Dollar General does that by itself. DLTR is playing catch-up no matter what it does.
Family Dollar Stock in the Sweet Spot
That puts Dollar Tree in a tough position. DLTR can avoid becoming a distant No. 2, but only by raising its bid — and FDO may not be worth it. After all, most mergers don’t work as advertised.
Dollar General is likewise at risk for overpaying. Promises of cost savings are usually overblown — in this case so-called synergies are pegged at $550 million to $600 million. DG would also divest 700 stores to quell antitrust concerns — and pay a breakup fee to Dollar Tree of $305 million. That’s a lot of money and a lot of promises.
This bidding war might just be getting started, but there’s no doubt it’s the best thing to happen to dollar store stocks this year. Dollar General stock swung from a year-to-date loss of 5% to a gain of 5% after it bid for Family Dollar. Family Dollar soared to a 23% gain on the year. Even Dollar Tree stock, which is getting punished in wake of the competing bid, has remained stable, albeit at a YTD loss of 3.5%.
That stability may not last long. DLTR stock looks like it could fall whether it bows out or raises its bid. As the smallest of the three, DLTR can’t afford to let Dollar General win Family Dollar. At the same time, no company benefits from overpaying. The market won’t like it — at least in the shorter term.
As such, DLTR looks like a sell at this point. It’s damned if it does, damned if it doesn’t. FDO probably has a little more upside, if only because the market is betting on a superior bid from Dollar Tree.
And Dollar General is a hold. Whether it wins or not, there’s enough room for two big dollar store chains, and the economic forces weighting down their stocks won’t last forever.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.