Dollar Tree and Family Dollar Merger Gets More Complicated
During the final week of July, some amazing industry news suddenly broke. The story was so intriguing that Chain Store Guide’s July insight focused entirely on it and a few possible ramifications. It was announced that the nation’s third leading dollar store chain, Dollar Tree, was acquiring the country’s long-time number two, Family Dollar for a proposed $8.5 billion.
The shockwaves set off by this ‘proposed’ acquisition, must have evoked several tremors, as many stories announcing this likely industry shaking transaction, sounded as if the agreement had been consummated and was essentially a done deal. True, each of the respective boards had voted their approval, however, even in the best of circumstances, considerable time will elapse before the companies can officially combine.
Several government agencies must snap their best bureaucratic behavior to attention, in order to consider the ramifications of this proposed acquisition on consumers, competitors and of course the stock market, to name a few. There are excellent possibilities that retail and financial professionals will have to offer their expert analyses. Shareholders have a strong voice which could easily derail the process of combining the companies. There may even be time for consumers to testify on the impact of such a merger on their tight finances, especially in light of the havoc recessionary forces continue to evoke on them.
The actual communiques from the parties proposing the grand merger did indicate that the companies don’t expect the transaction to be finalized until sometime in 2015. Interestingly most stories announcing Dollar Tree’s acquisition didn’t seem to consider the possible threats to the creation of what would instantly become the nation’s number one dollar store chain, both in terms of store count and annual sales.
Now another threat to the merger has reared its head. Word has gotten out that Dollar General is seriously considering entering the picture to offer its own terms for Family Dollar. Currently DG directors and executives are engaged in meetings, not only to determine how to value its entry price for such a deal, but also to determine solutions to issues such an acquisition could impact on the company.
In addition to considering how much duplication of store locations would have to be eliminated from respective markets, Dollar General management would have to make high level estimates, including projecting how much more buying power the resulting company would have. This could allow the newly formed company to reduce product and supply chain costs and then prices, while increasing margins. This would likely attract more customers and raise financial expectations.
Such an acquisition might also upset the retirement plans of Dollar General CEO Rick Dreiling. Mr. Dreiling has announced his plans to retire by May 2015. However it is common knowledge that he might exit the company earlier if a successor is put in place in a timely manner and he feels an early departure would align with the interests of the company. The complexities of a merger between the two top dollar retail giants could create a situation which would call for a delay in Dreiling’s retirement plans in order to implement a relatively smooth and necessarily efficient transition.
Many have been speculating as to how many of a merged company’s store locations would be deemed redundant within the many markets any combination of these giants share. Dollar General operates well over 11,000 stores and Family Dollar owns more than 8,000 locations, while Dollar Tree runs over 5,000 stores. Each chain has plans to maintain aggressive growth patterns within their respective counts.
At this early stage of the Dollar Tree’s proposed Family Dollar acquisition, many observers have speculated that there would likely be considerable activity in terms of store closures due to simple redundancies within markets. However, these dollar chains operate on two distinct platforms. Dollar Tree is a single price retailer, while Family Dollar is an extreme value enterprise.
Dollar Tree operates its Deal$ stores as somewhat of a hybrid between these two dollar pricing models. In speaking to both Deal$ store managers and assistants during the openings of new locations, new store personnel often refer to their store as being based on Dollar Tree products, all for sale at the one dollar price point. They go on to endorse their store as having the advantage of offering additional products, ‘clearly’ priced higher but at price points which they expect to favorably compete with their Family Dollar and Dollar General rivals.
That noted, the acquisition of Family Dollar would seem a natural complement to the Deal$ side of the business, which until now has experienced tepid growth, at best. Adding Family Dollar would expand on buying power for the multitude of Deal$/ Family Dollar products, which come in at multiples of the single dollar price point. Thus the company resulting from a merger might indicate less in-market redundancies than many might expect.
A Family Dollar acquired by Dollar General would certainly create many more redundant locations than would the result from the former merger. First Dollar General operates easily more than twice the locations than does Dollar Tree, which naturally implies much more intra-market crossover. Second Dollar General and Family Dollar employ similar merchandising schemes, so much so that knowledgeable observers often admit to confusing them.
Dollar General has turned down offers to acquire Family Dollar in the past. Though DG hasn’t yet begun formal negotiations with Family Dollar on a possible opening of acquisition talks, its current interest is likely the result of the possibility of soon no longer having the option to enjoy the synergies of such a merger, once the Dollar Tree offers clears all hurdles.
Another possible factor which may be provoking Dollar General’s interest in an acquisition is the huge elephant in the box. Walmart has long envied the successes and efficiencies enjoyed by these dollar chains. Walmart’s interest in acquiring Family Dollar has long been rumored. However the big box giant has been focused on revamping U.S. operations while continuing to expand internationally. For the past year Walmart has been claiming to focus on growing its small store formats through its Neighborhood Market and Walmart Express footprints.
However, Neighborhood Market stores are essentially supermarkets and don’t really compete with established dollar store models. The Walmart Express format remains the work in progress it was deemed at its inception. It has yet to really catch on with consumers and likely with Walmart brass. Walmart has been slow to grow the brand, while the three national powers continue aggressive expansion models. No one currently discusses the Express format as any type of challenge to even independent dollar stores.
With all these factors to consider, it may seem likely that sometime early next year the Dollar Tree acquisition of Family Dollar will be a done deal, however this is far from certain. Clearly a myriad of factors can obstruct completion of the deal. There is already a story that a prominent Family Dollar shareholder has filed suit to block this deal, which is actually in large part the result of pressures brought on by notorious billionaire company investors Carl Icahn and Nelson Peltz. The suit attempting to block the deal is based on the belief that Family Dollar directors failed to properly seek the best deal for the company.