Dollar Tree, Inc. (NASDAQ:DLTR) and Family Dollar Stores, Inc. (NYSE:FDO) surprised Wall Street today by announcing a merger, and now analysts are weighing in. Goldman Sachs analysts have some questions for management, while Canaccord Genuity analysts said the proposed merger comes as a total surprise.

Carl Icahn
Carl Icahn image via FBN

Shares of Family Dollar skyrocketed by 24% today, while Dollar Tree stock jumped 3%.

Carl Icahn: “Activism is alive and well”

There were originally speculations that Carl Icahn would push for a merger between Family Dollar and Dollar General Corp. (NYSE:DG), but he still won this round because his main focus was getting Family Dollar to sell itself. In a statement posted on his website, Shareholders’ Square Table, Carl Icahn said he still thinks there are other possibly buyers that might see even more synergies by coming with Family Dollar. He even said that he would like to see another offer surface to compete with the offer from Dollar Tree.

Overall though, he calls the deal between Family Dollar and Dollar Tree “a big win for all shareholders of Family Dollar” and said that he is “extremely pleased” with it. He also said this is “yet another validation of the activist investment philosophy in general.”

Multiples for the Family Dollar – Dollar Tree bid

The deal is worth $74.50 per share for Family Dollar shareholders. That includes $59.60 per share in cash and $14.90 per share in stock. The stock part of the deal, which suggests a $9.2 billion enterprise value, is subject to a collar. According to Goldman Sachs analysts, this represents a TTM EV / EBITDA multiple of 11.3 times or 8.3 times, including the $300 million in annualized synergies.

So far, Dollar Tree said it has secured $9.45 billion in financing from JPMorgan Chase & Co. (NYSE:JPM). The retail chain said it will use that financing and some of its cash on hand to finish the acquisition.

Questions for Dollar Tree

In a report dated July 28, 2014, Goldman Sachs analysts Stephen Grambling and Christopher Prykull said they’ll be looking for a number of things in connection with the transaction. Management had said it will be accretive to cash earnings per share within just the first year of its closing. Grambling and Prykull estimate that the $300 million in expected annualized synergies, which management said they expect, will result in a 19% accretion for the combined company.

However, they will be watching the timing of those synergies and also how they are split between expenses and gross margin. They also are waiting to see whether management has plans to shut down some stores. In addition, they wanted to know whether there are measures in the agreement between Family Dollar and Dollar Tree to prevent another company from swooping in with a more competitive bid.

Dollar Tree surprises in spite of Carl Icahn’s involvement

In spite of Carl Icahn’s involvement, Canaccord Genuity analysts Laura Champine and Jason Smith said the merger announcement was a huge surprise. In their report dated July 28, 2014, they said the merger will “create an instant market-share leader.” Together, the two discount retail chains operate 13,326 stores and have generated $18.4 billion in total sales over the trailing 12 months. They note that competitor Dollar General alone had 11,338 stores in operation and $17.8 billion in sales.

The analysts say Dollar Tree gets to “substantially” expand its number of stores “in the multi-price point channel.” Currently the retail chain only runs 217 Deal$ stores, making up only 4% of its total base. The deal with Family Dollar would increase its multi price-point exposure to more than 8,400 or 64% of the combined company.