NEW YORK (TheStreet) -- Analysts believe a Family Dollar (FDO) merger with Dollar General (DG) would create meaningful cost synergies and help unlock value at both dollar store chains. Speculation of a possible merger has heated up after Carl Icahn disclosed on Friday he's taken a 9.4% stake in Family Dollar and seeks talks with the company's management.
Icahn joins a list of activist investors who have taken large stakes in Family Dollar including Trian Management with a 7.35% stake in the company's shares and John Paulson-run Paulson & Co. with a 5.68% stake, according to Bloomberg data. The prominence of activist hedge fund investors, in addition to Icahn's apparent efforts to consult with Family Dollar over its operations and possible strategic transactions, is giving fodder for analysts to speculate on merger scenarios.
A merger of the nation's two biggest dollar stores could create large cost synergies that would create significant value for both companies, Jefferies analysts said in a Monday client note that upgraded both Family Dollar and Dollar General shares to "buy."
Jefferies believes synergies could run between $950 million and $1.2 billion in the event of a Dollar General takeover of Family Dollar. Were Dollar General the acquirer of Family Dollar, Jefferies calculates the merged company would earn between $5.50-a-share and $6-a-share in 2014.