'Dollar' stores merge to fend off retailer

A deal announced Monday for Dollar Tree Inc. to acquire rival Family Dollar Stores Inc. gives the combined retailer many more stores in the small-store arena than Wal-Mart, even with Wal-Mart's ongoing small-store building spree.

Dollar Tree entered into a definitive agreement to acquire Family Dollar for $74.50 per share -- $59.60, or 80 percent, in cash and $14.90 in equivalent Dollar Tree shares. The deal is valued near $9.2 billion, including debt assumption. Approved by the boards of directors of both companies, the deal is expected to close early next year. Each will continue to operate under its own brand.

Industry insiders are watching with interest to see how things shake out between the world's largest retailer and the "dollar" players -- the combined Dollar Tree/Family Dollar and Dollar General Corp., each of which now operates some 13,000 stores, said Sandy Skrovan, U.S. research director for London-based Planet Retail, a global retail research and intelligence firm.

The dollar outlets -- some stand-alone stores and some located in strip malls -- are comparable with Wal-Mart's Express stores, which are about 12,000 square feet and carry about 10,000 items.

"Our take is that the Dollar Tree/Family Dollar combination will most definitely forge a bigger, more formidable competitor for Wal-Mart, especially now that Wal-Mart looks to accelerate in that small-box, convenient space, primarily with the Wal-Mart Express moves it's making," Skrovan said.

It's almost as if the Dollar Tree/Family Dollar deal is a preemptive strike against the Bentonville-based retailer, keeping Wal-Mart from taking over in the value-store field, she said.

"They made a first move, and I think it was a very smart move," she said. "It's their way of fighting back, saying, 'We're not going to cede our position to Wal-Mart.'"

As of February, Wal-Mart operated about 20 Express stores and had plans to open 270 to 300 more Express and Neighborhood Markets, also smaller-format stores, in fiscal 2015. Even with so many dollar stores, Wal-Mart's small-store sales are about four to seven times those of the dollar stores, outgoing Wal-Mart U.S. President and CEO Bill Simon has said.

The Motley Fool, a multimedia financial-services company that provides financial solutions for investors through various stock, investing and personal finance products, has said Wal-Mart's small-store expansion amounts to announcing its intention to "kill dollar stores."

"While Dollar Tree's format is highly differentiated in the value retail sector -- the purchase of Family Dollar now exposes Dollar Tree to the growing competitive fray between juggernauts such as Dollar General, Wal-Mart, and the drug store chains," Raymond James hardline retail analyst Dan Wewer said in a research note distributed to clients Monday.

Business on 07/29/2014

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