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Family Dollar's Lost Way Leads Levine into Hands of Peltz, Icahn

Stocks in this article: FDO DG WMT

Wall Street Gets Rich From Dollar Stores

Dollar General, like Family Dollar, traces its roots to a single store in the South in the 1950s and it went through rough patches in a near-four decade run on public stock markets. Dollar General's founding family, however, is no longer involved with day-to-day operations. 

From 1968 to 2002, Dollar General operated with family management. It survived only five years independently once third generation CEO, Cal Turner Jr., ceded the company's reins amid an accounting scandal.

In came Wall Street.

KKR, an expert private equity firm in the business of turning around underperforming retailers, was in the process of expanding its retail portfolio when Dollar General hit hard times in the 2000s. According to Jason Kelly's The New Tycoons, KKR saw the deal also as helping insulate it from a U.S. economic downturn.

Mike Calbert, an executive at the firm, used Dollar General's falling stock price in 2006 to make an offer for the company. The parties agreed to a $6.9 billion takeover in March 2007.

Dollar stores struggled during the mid-2000s, in part, because consumers could afford to trade up to higher-cost retailers. In more troubled times, KKR believed Dollar General would win new customers. Further, Calbert and KKR's team had a plan in place to fix operational issues plaguing Dollar General, such as poor inventory management, weak zone pricing and inefficient store layouts.

Dollar General proved to be such a well-conceived investment by KKR it was one of the first large pre-crisis buyouts to go public in the wake of the 2008 financial crisis. By the time KKR exited Dollar General in late 2013, the fund had made over five times its money, according to calculations by Oppenheimer analysts.

Family Dollar Draws Copycats

As KKR's success with Dollar General became evident and sales kept growing across low-cost retailers, large hedge funds looked to copy KKR's playbook with Family Dollar. In February 2011, Trian Management took about an 8% stake in Family Dollar and proposed to buy the company for $7.6 billion.

Bill Ackman of Pershing Square Management was briefly also a player. He took a large stake in Family Dollar with the hope that a PE firm would look to replicate what KKR pulled off with Dollar General. Within a year, however, Ackman sold his Family Dollar shares at a loss. 

Analysts and investors contacted by TheStreet believe Trian never intended to buy Family Dollar. Instead, they think the fund was hoping to drum up a bid from PE players, or a competitor like Dollar General or Walmart.

Trian settled with Family Dollar in September 2011 by installing Edward Garden, a longtime executive of the fund, as an independent director to the company's board.

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