NEW YORK (TheStreet) -- The first major failure of the Doug McMillion administration at Walmart (WMT) is clear: not being bold enough to pay a premium to buy the instant marketplace recognition and square footage held by dollar store Family Dollar (FDO).
As Walmart stays true to its insular culture, dollar store Dollar Tree (DLTR) has realized the opportunity embodies its longtime rival Family Dollar. In a deal announced Monday, Dollar Tree will purchase Family Dollar for $74.50 per share, a whopping 22.8% premium to the closing price on July 25, 2014. Upon the deal's expected closure in early 2015, the company will operate a 13,000 stores across 48 states, a formidable retail presence, selling consumers fixed price merchandise ($1 or less) under the Dollar Tree banner and multi-priced goods at Family Dollar.
Walmart shares were slipping 0.5% on the announcement to $75.60, a dip that has only begun to appreciate the lost opportunity to get closer to economically-sensitive customers in rural and urban markets that view a trip to a super-center as expensive. The addition of Family Dollar to Walmart would have afforded the retail giant the luxury of utilizing the smaller size of Family Dollar stores as same-day delivery hubs for Walmart.com merchandise.
Now, the world's largest retailer, which my Belus Capital Advisors rates as a sell with a $71.00 price target due to an outlook for continued margin pressure (this only worsens in a combined Family Dollar/Dollar Tree world), should expect an all-out assault on the fundamentals of its business. The merged dollar store is likely to benefit from deal synergies estimated at a $300 million run rate by the end of 2018 to invest in new store layouts that could offer more fresh food options, among other new offerings.