Family Dollar is the subject of a takeover battle. Is now a good time to buy?

Ted

Updated: Oct 12, 2018 at 2:43PM

Published: Oct 6, 2014 at 2:00PM

Family Dollars (NYSE:FDO.DL) stock price has soared 29% since becoming the subject of a takeover battle between two competitors. Dollar Tree (NASDAQ:DLTR) and Dollar General (NYSE:DG) are fighting for control of the discount chain, and the outcome has tremendous implications for Family Dollar stockholders.

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Image source: Getty Images.

Given that the stocks price has risen significantly as a result of the takeover offers, Family Dollar is only attractive if a deal goes through at a higher price than where the stock currently trades. Lets investigate the chances that investors will profit from buying Family Dollars stock today.

Most likely to accept Dollar Tree bid
There are four scenarios that could play out:

  1. Dollar Trees bid wins.
  2. Dollar Generals bid wins.
  3. A higher bid is made and accepted.
  4. No deal is made.

Family Dollars board of directors appears committed to accepting Dollar Trees bid. Unfortunately, this is not a favorable scenario for current shareholders.

Dollar Tree announced its bid on July 28; it offered $59.60 per share in cash, and $14.90 in Dollar Tree shares for each share of Family Dollar. The total deal is worth $74.50 per share.

Family Dollar shareholders buying in today will lose out if the Dollar Tree bid is accepted. Family Dollar shares closed on Oct. 3 at $78.22, so accepting the bid at $74.50 would lead to a 4.8% loss for investors who buy at the current price.

Despite the markets enthusiasm for a higher bid, Family Dollars board seems intent on accepting Dollar Trees current bid. It has rejected multiple higher bids from Dollar General, citing possible antitrust violations as reasons why the deal could fall apart. As a result, the odds seem to be in favor of a deal being completed at $74.50 -- a poor outcome for stockholders buying in at todays price if they cash out immediately after the deal is done.

Alternative scenarios
Despite the slim odds, one of three other scenarios could take place. First, Family Dollars board could change its mind and accept Dollar Generals current bid. The larger rival offered $80 per share in an all-cash deal to acquire Family Dollar. However, even if the improbable happens, and Family Dollar decides to accept this offer, it represents just a 2.3% increase over the current stock price. As a result, this outcome does not provide much upside for the risk taken.

Alternatively, a new and higher bid could come into play. This is the only option that could give current shareholders a decent, quick return. Its unlikely that Dollar Tree would bid higher than $80 -- if it even raises its bid at all -- because theres far less risk that regulators would nix the combination, giving it no reason to top Dollar Generals bid.

More likely, Dollar General would make a higher bid, or Wal-Mart (NYSE:WMT) could join the fray. Either case could result in solid gains for Family Dollars shareholders, but both are entirely speculative, and therefore not worth hanging your hat on.

Finally, all deals could fall through, and Family Dollar shares could return to their pre-announcement price of about $61. This would result in a 22% drop from its current price -- an awful outcome for shareholders. Fortunately, a deal with Dollar Tree seems likely to go through unless shareholders vote against it. Even a vote against the Dollar Tree deal could make Family Dollar shares rise if the board feels compelled to accept the higher bid from Dollar General.

Weighing the possibilities
Family Dollar will most likely be acquired by Dollar Tree in a deal that gives shareholders an immediate 4.8% loss from the current stock price. Barring a higher offer, Family Dollars stock has only 2.3% upside in the case that the board accepts Dollar Generals offer.

In a worst-case scenario, Family Dollars stock price could drop precipitously if no deal is completed. Even though theres a possibility that a higher bid will come through, its entirely speculative and cannot be counted on. Therefore, Family Dollars stock has more downside than upside, making it a poor time to buy.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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