By Alexia Elejalde-Ruiz and Anastasia Forina, Tribune reporters
Dollar Tree announced Monday that it plans to buy rival Family Dollar for $8.5 billion, a merger that would unseat Dollar General as the nation’s largest discount retailer in terms of store count and fend off increasing competition from big-box retailers like Wal-Mart.
The deal, which was unanimously approved by the boards of both companies, would bring the company’s store count to 13,000 across the U.S. and Canada and its combined sales to more than $18 billion, while keeping the two brands and their pricing strategies distinct.
“This way we can serve a broader range of customers in more ways,” Bob Sasser, CEO of Chesapeake, Va.-based Dollar Tree, said during a call with analysts. Sasser would be CEO of the combined company, and Family Dollar CEO Howard Levine, whose father opened the first Family Dollar store in 1959, would report to Sasser.
Dollar stores generally have been doing very well since the recession began, as consumers strive to save their pennies, though their growth has slowed in recent years because of food stamp cuts, food deflation and heightened competition from large retail chains like Wal-Mart as well as from small discount stores, said Morningstar analyst Ken Perkins.
The merger is “not great news for Wal-Mart,” said Canaccord Genuity analyst Laura Champine. “Dollar Tree is generally better run than Family Dollar was, so it could mean that Family Dollar has better products and more consistent merchandising.”
Dollar Tree expects the deal to bring $300 million in annual savings by 2018 through increased buying power and consolidation of distribution centers, which would make the small-format, conveniently located stores more competitive against Wal-Mart, Perkins said.
Stay-at-home mom Tanya Scruggs-Ford, who was shopping at the Dollar Tree at 2593 N. Elston Ave. on Monday afternoon, said she used to shop at Target and Wal-Mart but, since having a child, she prefers to head to Dollar Tree for household supplies and toys for her 15-month-old.
“I can come here and spend $20 versus spending $100 somewhere else,” said Scruggs-Ford, 39, who lives in the Logan Square neighborhood. “We want to save our money for more family-oriented activities.”
Gloria Strong goes to Dollar Tree stores to buy items for her dog; location and low prices keep her going back.
“I can get what I need at a lower cost than in a bigger store like Target, and I live really close to a Dollar Tree store, so it’s very convenient for me as well,” said Strong, 55, who works as a makeup artist.
“I don’t go to Family Dollar; there is none close to me. The Dollar Tree usually has everything — from pet items to food — and if you have a party, they have a lot of paper plates and stuff like that.”
Dollar Tree plans to evaluate whether some Family Dollar stores should be re-bannered as Dollar Trees, and vice versa, but there are no plans at this time to close stores, executives said.
“I think the broader environment is outstanding for growth,” Sasser said. “Everybody likes a value, whether you have a little money to spend or a little more money to spend.”
Luis Torres, a 24-year-old father of three, said he does most of his shopping at Dollar Tree. He goes three to four times weekly to buy household supplies, candies and toys, which helps him save money to pay for gas bills and activities for his children.
“I buy everything they got in here,” said Torres, who works as a security guard. “It’s affordable; it’s not as expensive as other stores like Target and Wal-Mart. At Family Dollar, I buy house supplies, but here, everything is affordable, everything is actually a dollar.”
Sasser and Levine said they expect little cannibalization between their stores because their aims are complementary.
Dollar Tree, which has 4,891 stores in the U.S. and 189 in Canada, prices all its products at $1 or less and tends to serve a suburban middle-income customer base. Family Dollar, which has 8,246 U.S. stores, sells items at multiple prices, mostly less than $10, and tends to serve a lower-income urban and rural clientele.
Matthews, N.C.-based Family Dollar had been struggling over the past few quarters, as a result of having more underperforming stores in more difficult locations, Perkins said. After a disappointing winter quarter, the retailer announced it would lower prices on 1,000 items, reduce workforce, close 370 underperforming stores and open fewer stores.
Under terms of the deal, Family Dollar shareholders will receive $74.50 for each share they own, a 23 percent premium over Family Dollar’s closing share price Friday. That puts the value of the company at $9.2 billion, including debt. Shareholders will receive $59.60 in cash and $14.90 in Dollar Tree stock.
Family Dollar’s sale is a win for its shareholders — particularly its largest shareholder, activist investor Carl Icahn, who has been urging the company to sell itself. He stands to make a profit of about $200 million based on the price at which he bought his 9.4 percent stake in the company, according to Reuters calculations.
Icahn had touted Dollar General, which has 11,000 stores and $17.5 billion in annual revenue, as a potential buyer.
Scot Ciccarelli, an analyst with RBC Capital Markets, said in a note to investors that the deal might decelerate Dollar Tree’s 7 percent annual store-growth rate.
“The cost synergies with Family Dollar should be significant and Dollar Tree has proven to be a very well-run company,” he wrote. “However, Dollar Tree will now also inherit Family Dollar’s greater exposure to low-income consumers and, in our view, some of the volatility that goes with that exposure. This deal adds size and scale, but with Family Dollar being run as a separate company, we don’t see a ton of strategic synergies.”