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Why Family Dollar Is Avoiding the Wrath Of Carl Icahn With $8.5B Dollar Tree Deal

Stocks in this article: FDO DLTR DG WMT

Updated from 9:55 a.m. ET to include opening share prices and analyst commentary in the tenth paragraph.

NEW YORK (TheStreet) -- After more than a half-century under family management, Family Dollar (FDO) CEO Howard Levine, son of company founder Leon Levine, will turn over the company's reins to Dollar Tree (DLTR) through a $8.5 billion cash and stock merger of the two discount store chains. Perhaps, Monday's deal allows Levine to gracefully exit Family Dollar without the public wrath of Carl Icahn, who became the company's largest shareholder in July 2014 and called for its sale.

Once considered a savvy manager, Wall Street soured on Levine as same-store sales at Family Dollar flat lined and the company's profit margins dramatically underperformed peers. Icahn took his stake in Family Dollar as it appeared Levine was looking for a last shot at saving the company.

Family Dollar's brand will continue to exist after its merger with Dollar Tree. Levine will remain as CEO of Family Dollar's branded operations and he will be given a seat on the company's board of directors. However, the deal comes amid a tumultuous few years for Levine, who successfully expanded Family Dollar through two recessions since taking the company's reins from his father in 1998.

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In April, Levine told Wall Street analysts Family Dollar had "lost its way" amid management departures, over-expansion and a misfired change to the company's pricing strategy. Levine then began telling investors he still had the support of the company's board and he began selling a plan to return Family Dollar to succes through operational improvements. Ultimately, however, Levine and Family Dollar's board decided to sell the company to Dollar Tree.

Levine hired Morgan Stanley last winter to review Family Dollar options and after fielding many takeover offers, he said Dollar Tree was best suited to push forward the company planned operational improvements. It is too be seen whether other discount store competitors like WalMart (WMT) and Dollar General (DG) or private equity buyers attempt a competing bid.

Hedge fund Trian Management, a long-time shareholder in Family Dollar that gained a seat on the company's board in 2011, and Levine both said they would vote their shares in support of Monday's merger. Combined they own 16% of Family Dollar's stock.

Icahn, who owns roughly 9% of Family Dollar's shares wasn't acknowledged in a Monday press release. However, it is unlikely he would argue with the strategic merits or financial rewards Family Dollar's tie-up with Dollar Tree. The activist appears to have made paper gains in the neighborhood of $200 million since making his investment in Family Dollar in June.

Dollar Tree will pay Family Dollar shareholders $59.60 in cash and $14.90 equivalent in Dollar Tree stock. Family Dollar's overall $74.50 price tag represents approximately a 22% premium from its Friday closing price, and will give existing shareholders an up to 15% stake in the combined company.

Family Dollar shares were gaining over 21% at $73.71 in early Monday trading. Dollar Tree shares initially surged nearly 10% in pre-market trading, however, shares lost most of their gains and were trading about 2% higher at $55.41 on Monday morning.

While analysts characterized Dollar Tree's acquisition as "bold" on a conference call, they appeared credulous about Family Dollar's performance in recent years and potential synergies in the deal. Analysts at Credit Suisse and Bank of America both questioned whether there was much overlap between the two companies given their disparate pricing strategies and the apparent decision to keep the Family Dollar brand going.

Credit Suisse downgraded Dollar Tree on the announcement of Monday's deal analysts at the firm said they believe Dollar General would be a better buyer of Family Dollar and could even make a competing bid.

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