Why Family Dollar Stock (NYSE: FDO) Gained 5% From Rival Takeover Bid

family dollar stock (NYSE: FDO)

Today (Monday), Family Dollar stock (NYSE: FDO) shot up 4.93% to finish at $79.81 a share following a $9.7 billion bid by Dollar General Corp. (NYSE: DG) to take over the second-biggest deep discounter. Dollar General stock also tacked on an impressive 11.63% by market close.

If Family Dollar accepts, the competing offer would break up FDO's planned merger with Dollar Tree (Nasdaq: DLTR) - the third-biggest deep discounter. DLTR shares fell 2.42% on news of a rival proposition this morning.

You see, exactly three weeks ago to the day on July 28, DLTR and FDO announced that the two companies' boards unanimously approved a merger. Dollar Tree was to pay $8.5 billion to buy its struggling rival.

The deal would have been worth $74.50 a share to Family Dollar shareholders, a 23% premium over the stock's closing price the previous trading session. FDO investors would have received $59.60 in cash and $14.90 in equivalent Dollar Tree shares. News of the merger sent DLTR shares soaring 25%, while FDO stock gained 26% quickly following market open.

That day, we reported that the outsized gains in both FDO and DLTR stocks suggested the price paid for FDO might be too low.

Several other analysts also speculated that Dollar General could come in with a competing bid.

"There might be more money to be extracted here," Jan Kniffen, chief executive officer of retailing and consulting firm J. Rogers Kniffen Worldwide, told CNBC's SquawkBox on July 28. "I was actually surprised when I saw the announcement because when I read it I assumed it was Dollar General and Family Dollar and it turned out to be Dollar Tree and Family Dollar. We all assumed that [Dollar General-Family Dollar] was the very best match, because those two companies are more alike."

This morning, Dollar General said its all-cash proposal of $78.50 a share is higher than Dollar Tree's bid of $74.50 a share in cash and stock. DG chief executive Rick Dreiling said his company's bid "would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares."

"For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares," Dreiling said.

Should FDO shareholders agree with Dreiling, the merger would cement Dollar General as the largest dollar discounter in the U.S.

A little healthy competition is exactly what these dollar discounters need right now. Here's a breakdown on how the two different mergers compare...

Finding Value in DLTR, DG, FDO Stock

All three variety stores have been struggling due to an anemic U.S. economy, bad winter weather, job instability and growing competition from large discount chains such as Wal-Mart Stores Inc. (NYSE: WMT).

Family Dollar stock shed 18.63% a share from October 2013 through June 2014. In the same period, DG stock dropped 4.75%, and DLTR stock fell 7.23%.

In the last several months, North Carolina-based Family Dollar lowered prices on some 1,000 basic items and also trimmed headcount in an attempt to revitalize its business. The company was forced to shutter approximately 370 underperforming stores after a sour Q2 2013 - a stark contrast to its original announced plan to triple its retail presence around the country.

A combination with DLTR or with DG would pad Family Dollar's $10.39 billion it currently makes in sales. Either would also expand on FDO's 8,000 stores in 46 states.

Dollar Tree has 4,900 stores that bring in $7.84 billion in sales. An FDO-DLTR merger would combine for sales of around $18 billion.

In contrast, Dollar General brings in more than $17.5 billion with its 11,000 stores. An FDO-DG merger would combine for sales of around $28 billion - $10 billion more in revenue than Family Dollar would score in the Dollar Tree deal. Dollar General also said it expects to generate $550 million to $600 million of cost savings.

Last month, Family Dollar chief executive officer Howard R. Levine said the deal with Dollar Tree "represents the successful culmination of a comprehensive strategic review process" that his board began this past winter. "This combination will enable Family Dollar to accelerate efforts to improve the business," he said.

Levine's words then seem as though they could apply just as fittingly to a combination with Dollar General - especially considering it's a better offer.

Depending on Levine and Family Dollar shareholders' decision, either DLTR or DG will be left out to compete in dollar discount retail solo. And either way, Family Dollar stock will benefit.

On Friday, news of another giant merger hit headlines: Monster Beverage Corp. and The Coca-Cola Co. Here's everything you need to know about the deal that sent both stocks soaring...

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