Family Dollar And Dollar General? RBC Says Not A Done Deal

Family Dollar And Dollar General? RBC Says Not A Done Deal
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Activist investor Carl Icahn is on the prowl again, and this time his target is Family Dollar Stores, Inc. (NYSE:FDO). Icahn has recently been involved in pressuring management to create immediate shareholder value at Apple Inc. (NASDAQ:AAPL), eBay Inc (NASDAQ:EBAY) and Netflix, Inc. (NASDAQ:NFLX).

Icahn’s dinner with Family Dollar management

According to a number of sources, Carl Icahn met with the management of Family Dollar Stores, Inc. (NYSE:FDO) over dinner earlier this week. Then on Thursday afternoon, Icahn and affiliates filed an amended form 13-D disclosing another letter in which Icahn says he strongly disagrees with management’s opinion regarding the future of the company.

Icahn uses the letter to point out Family Dollar’s underperformance compared to peers across a number of operating metrics, and argues the company should put itself up for sale immediately. The letter also proposes adding three new members to the company’s BoD to work in a ‘friendly and collaborative’ manner toward the sale of the company. Icahn said that if management doesn’t agree, that he plans to call for a vote of shareholders in a consent solicitation to remove the whole board and replace them with individuals committed to maximizing shareholder value.

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Not a done deal

A recent note to investors from RBC Capital Markets released Thursday June 19, highlights that it’s hard to imagine that the two parties will work in a“collaborative” manner at this point, and it’s likely to come down to a shareholder vote. As of his most recent SEC filing, Icahn only owns 1.3 million shares of Family Dollar Stores, Inc. (NYSE:FDO), but he also owns almost 9.5 million in-the-money options. In total, that would represent an equity stake of 9.4% in Family Dollar for Icahn if he chose to exercise the options.

RBC’s Scot Ciccarelli points out that Dollar General would be the “natural strategic buyer” for Family Dolla . He estimates that in a base case scenario, Dollar General might pay as much as $75 per share and still have an accretive transaction.

That said, there’s no evidence that Dollar General Corp. (NYSE:DG) wants to buy Family Dollar and Family Dollar’s management team has certainly made it clear they do not want to sell the company. Ciccarelli also points out Family Dollar is an unlikely fit with other strategic buyers such as Wal-Mart Stores, Inc. (NYSE:WMT), while “convenience store companies are generally too small”. He also says “PE buyers… likely would not be able to pay as much as a strategic buyer”. He sums up his point of view by sayiing, “Icahn is being vocal as we expected, we aren’t quite sure a deal will happen any time soon.”

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