Dollar Tree expects Family Dollar deal to close by February

CHESAPEAKE, Va. — Dollar Tree on Friday suggested its pending merger with Family Dollar could be completed as early as February 2015 with a "relatively small number" of divestitures. However, Dollar Tree and Family Dollar have agreed not to close the pending merger until Jan. 30, unless the Federal Trade Commission completes its review beforehand. 

 

"The staff of the FTC is very focused on the discount retail sector ... and has indicated that some divestitures will be required for the pending merger," Dollar Tree stated, suggesting that the divestiture requirement would be no larger than its original commitment of 500 stores. "Dollar Tree will work diligently with the FTC staff over the next few weeks concerning divestitures." 

 

Dollar Tree believes that a Dollar General/Family Dollar merger would necessitate the divestiture of more than 1,500 Dollar General locations. "While roughly 150 Family Dollar stores adjust prices due at least in part to the presence of Dollar Tree, about 5,400 Family Dollar stores adjust prices due at least in part to the presence of Dollar General," Dollar Tree reported.

 

"Fewer than 50 Family Dollar stores are in zones where prices could rise by more than 2% on average under Family Dollar’s pricing rules in the absence of a Dollar Tree. By contrast, more than 3,300 Family Dollar stores are in zones where prices would rise by more than 2% on average under Family Dollar’s pricing rules in the absence of a Dollar General."

 

Dollar General responded that Walmart, not Family Dollar, is the primary driver regarding Dollar General's strategic pricing decisions and that 90% of Dollar General's SKUs are nationally priced and not subject to zone pricing. "Dollar General is confident that its approach to strategic and pricing decisions is both correct and superior to that of Family Dollar and Dollar General has no intention of adopting a flawed strategy - either now or after an acquisition of Family Dollar - that it believes would impair its ability to compete with Walmart and lead to inferior financial performance," the company stated. 

 

Dollar General is still favored to win the Family Dollar prize, suggested Sterne Agee analyst Chuck Grom, noting that Dollar Tree has not increased its bid of $74.50 per share for Family Dollar. 

 

"We ultimately see Dollar General winning this deal," Grom wrote. "For a number of reasons, mostly the company’s ability to raise its bid to a level that Dollar Tree would find challenging, we believe Dollar General will ultimately prevail." Either way, Grom is bullish on the dollar channel. "Longer-term, with Wal-Mart scaling back its Express store efforts and the high likelihood of a more rational dollar store promotional backdrop (post consolidation) down the road, the prospects for the space remain favorable," he said. 

 

Dollar Tree is optimistic that the Federal Trade Commission recognizes and appreciates the two distinct business models that Dollar Tree and Family Dollar pursue, respectively. Dollar Tree provides a treasure hunt opportunity for its consumers where the merchandise mix is constantly in flux. In contrast, Family Dollar's merchandise mix is relatively stable with value-driven pricepoints rising up to $20 and more. 

 

"[Family Dollar] customers expect Family Dollar to carry the same assortment of products week in and week out. [Dollar Tree] customers have no such expectation," Dollar Tree stated. "Additionally, our customers do not have the same demographics or shopping objectives as Family Dollar’s customers, and our econometric analysis supports our opinion."

 

The special meeting of Family Dollar shareholders to vote on the pending merger with Dollar Tree is currently scheduled for Dec. 23.