Dollar General's offer, which it's now taking directly to shareholders, is $80 in cash for each Family Dollar share, or $9.12 billion. That's for a company that was overpriced, in April, at $57.
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Family Dollar was overpriced then because Dollar General is winning in the marketplace. In small towns where Family Dollar opens a store and Dollar General comes in later, I have seen that the Family Dollar usually disappears quickly.
Both stores are simple cinder block structures built near the edge of town. They're not worth much empty, any more than the old downtowns they replace are worth much empty. Thus, Dollar General's offer to close up to 1,500 stores to appease regulators is also empty. It would probably be doing that anyway to avoid duplication.
As this battle has played out, retail investors have left both stocks. Family Dollar is now 91% owned by institutions; Dollar General is 90% owned by institutions. These guys are very likely to cheer the new offer. But where is the cash going to come from? Dollar General may have $10.82 billion in total assets, but only $3.14 billion are current assets and it has only $172.5 million in cash. Meanwhile, it has $2.98 billion in debt. Dollar General will have to issue new shares and/or take on more debt to make the purchase.
What shape will Dollar General be in to compete with anyone after this gets done?
There are two markets for Family Dollar and Dollar General stores: poor neighborhoods and small towns. Dollar Tree isn't in either. Dollar Tree is a dollar store. Everything costs $1. It is complementary to supermarkets and other retailers, often situated next to them. Middle-class shoppers browse for bargains before their regular shopping or come by for fun afterward. If Dollar General takes this prize, Dollar Tree shareholders should breathe a big sigh of relief.
Family Dollar and Dollar General, by contrast, put their stores in places too small or poor to support a Kroger (KR) - Get Report or a Walmart. These are towns that may have just 1,000 people, or the "food deserts" of our larger cities. You go to Family Dollar or Dollar General because you can't afford to go anywhere else.
The present battle started when investor Carl Icahn decided that Family Dollar CEO Howard Levine needed to sell out or be pushed out. Levine is going with DollarTree because that company won't fire his whole team, as Dollar General will have to in order to have any hope of getting out without bankruptcy.
What's left for the "winner" is Walmart, which now has store formats as small as 15,000 square feet, often with gas stations, under the name Walmart Express or Walmart Neighborhood Market, compared with the 9,100 square feet of the average Dollar General. These Walmart stores are small enough to go into many small towns and food deserts. They can be stocked in the same way as the larger Supercenters, with fresh fruit and vegetables as well as general merchandise.
Fresh product, stocked daily, against shelf-stable products stocked periodically? Walmart is going to kill Dollar General once the smoke of Wall Street battle clears.
At the time of publication the author owned no shares in companies mentioned in this article.
This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
TheStreet Ratings team rates DOLLAR GENERAL CORP as a Buy with a ratings score of A. TheStreet Ratings Team has this to say about their recommendation:
"We rate DOLLAR GENERAL CORP (DG) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, increase in net income, notable return on equity and increase in stock price during the past year. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
You can view the full analysis from the report here: DG Ratings Report
TheStreet Ratings team rates DOLLAR TREE INC as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:
"We rate DOLLAR TREE INC (DLTR) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, growth in earnings per share, notable return on equity, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
You can view the full analysis from the report here: DLTR Ratings Report