Dollar Tree, Inc. (NASDAQ:DLTR) has agreed to buy Family Dollar Stores, Inc. (NYSE:FDO) for $8.5 billion. Another company, Dollar General Corp. (NYSE:DG), has been the industry leader for quite some time and was initially in line to acquire Family Dollar Stores. Analysts have placed their bets on Dollar General Corp. (NYSE:DG) acquiring Family Dollar, as both companies are alike in many ways. Charles Grom, Sterne Agee managing director, talked on CNBC about the acquisition and Dollar General’s stand on it.
Grom said that he is not expecting Dollar General joining the race again to acquire Family dollar with higher bid. He thinks that Dollar General’s philosophy is to grow organically and buy back stock. He added that the retirement of Dollar General’s Chairman and CEO, Rick Dreiling, reduce their chances of a merger with Family Dollar further.
“I think the scenario for Dollar General is a little bit precarious, considering that there is a lot of investors that wanted DG to buy Family dollar to help earnings secretion after multiple years of nice improvement,” He said.
Grom added that Dollar General remained successful over the years due to poor performance of Family Dollar. He also said that many of Dollar General’s investors wanted DG to acquire Family Dollar and strengthen their position further in the industry. Dollar Tree’s acquisition of Family Dollar puts more pressure on Dollar General. He thinks that a more competitive backdrop would be generated, if Family Dollar can tune their costing structure, relative to Dollar General.
He said that Wal-Mart Stores, Inc. (NYSE:WMT) got into small stores and express format in the last few years. He pointed out that vote of confidence for this was derived from the success of these Dollar stores. He believes that Wall-Mart would be more aggressively rolling out such small stores in the days to come.