Dollar Tree Buying Family Dollar in a cheap Price?

Family Dollar in a cheap Price?

Dollar Tree is buying rival discount retailer Family Dollar Stores in a cash-and-stock deal valued at about $8.5 billion. Activist investor Carl Icahn has a big stake in Family Dollar, as does billionaire Nelson Peltz.

Family Dollar stock soared in premarket trading Monday—even shooting up above the generous 23 percent premium to where shares closed on Friday.

Under terms of the deal, stockholders of Family Dollar will receive $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share they own. The companies put the value of the transaction at $74.50 per share.

Family Dollar stock, which closed Friday at $60.66 a share, spiked nearly 25 percent in premarket trading.Shares of Dollar Tree were up almost 12 percent.

The action in both stocks indicate that the price tag for the deal might be too low, said Jan Kniffen, chief executive officer of J. Rogers Kniffen Worldwide—a retailing research and consulting firm.

Dollar Tree said the combined company would have more than 13,000 stores in 48 states and Canada, with sales of over $18 billion.

The press release made no mention of store closings, but Telsey Advisory retail analyst Joe Feldman sees that as a probability. "You would think that they will close some stores. There's a pretty large overlap with the store bases. Not quite as much if Family Dollar and Dollar General had merged."

Feldman said the deal would "raise some eyebrows" at Wal-Mart, which does about $300 billion in U.S. sales. "It does pick off that low-end customer ... [while] Wal-Mart is trying to go smaller but not with a dollar store concept. They are trying to go smaller grocery more."