Since July last year (2014) there has been an ongoing battle of the dollar stores. Dollar Tree (DLTR) made an original offer to acquire Family Dollar (FDO) for $76.85/share (magenta line). Based on our analysis that was a good price for the retailer. Family Dollar carries a Fair Value of $70/share (green arrow). The Dollar Tree offer holds a 9.8% premium above Fair Value. The chart below shows the offer price relative to fair value (yellow box).

You can see the immediate jump in trading price that takes place when Dollar Tree places the original offer. Subsequently, Dollar General (DG) decided to make a competitive protective move and offer $80/share for Family Dollar (green line). The price in the market makes an immediate move to $80 as soon as the offer is placed.

The market price fluctuates as the acquisition battle between the three companies continues for the rest of the year. Discussions about how many stores would need to be divested and whether the merger would be allowed by the Department of Justice rage while the market and management get tired of the conflict.

Eventually, the market price drops below Dollar Tree’s lower original offer. The market is discounting the acquisition will ever take place.

The acquisition is rather interesting from a fair value perspective because Dollar Tree is trading at a 40% premium over fair value. The combined company, (Family Dollar Tree?)would most likely start out overvalued and face strong downside pricing pressure. Since most mergers rarely deliver on expectations, the outcome has a high probability of being overvalued. On the other hand, the higher offer coming from Dollar General is coming from a company that is trading at much smaller 13% premium and has a higher probability of staying within fair value range post-merger. Dollar General would need to divest more stores than Dollar Tree, but the end value would be more in line with fair value. You can see both Dollar Tree and Dollar General at the following addresses:

Dollar Tree:

Dollar General:

An interactive chart of Family Dollar can be found at:

Market consensus appears to be favoring Dollar Tree, but I am not so sure that would be the best outcome for longer term shareholders. The offer from Dollar General is higher by $3.15/share. It is a more difficult merger due to regulatory and management matters. However, the end result may be better.

Time will tell.