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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Corporate mergers are said to have less success than marriages. Depending on the study, between 60 to 90 per cent of deals fail to deliver value to shareholders. Either figure would comfortably outpace the 6.9 per 1,000 women divorce rate recorded by the US Census Bureau in 2021.
Those keeping score should add another name to their list. Dollar Tree said this month that it was considering a sale or spin-off of Family Dollar. It bought the struggling discount chain for more than $9bn in 2015 after a fierce bidding war with rival Dollar General. The deal, meant to help it compete against bigger rivals, has instead become a profit drag.
While Dollar Tree stores are mostly in suburban locations and focus on middle-income households, Family Dollar caters mainly to low-income urban customers. That is a tough segment at the moment. Lower income Americans have reined in their spending. When they do open their wallets they head to Walmart for food and essentials.
The case for selling Family Dollar is straightforward enough. Although both chains pull in similar revenues, Family Dollar — saddled with rundown stores, bad locations and logistics problems — struggles to turn a profit. Its operating margin was negative last year, compared with Dollar Tree’s 13.6 per cent.
The former’s chronic underperformance has weighed on Dollar Tree’s results. Return on invested capital, which averaged 30 per cent a year between 2010 and 2014, came in at just 6 per cent in 2023.
Valuation per share has also suffered. Dollar Tree shares currently trade on an trailing enterprise value to ebitda of 12.3 times. Other value-focused retailers such as Dollar General and Walmart trade on 13.5 times and 15.5 times respectively. Dollarama, a similar Canadian chain, gets nearly 25 times.
Dollar Tree’s market value alone is worth $160 per share, thinks UBS. That would put it on an equity market valuation of $32.2bn. That is about 41 per cent more than its group valuation.
A sale would allow Dollar Tree to focus on growing its better performing namesake chain. It has already announced plans to close nearly 1,000 — or about 12 per cent — Family Dollar Stores. It has also taken $5bn in impairments on Family Dollar over the past five years.
Even with a reduced footprint, there are no obvious suitors for a business with over 7,000 stores. A spin-off or a private equity buyout — carving it up — look more likely. This would be an embarrassing climbdown. But that should be preferable to being stuck in an unhappy marriage.
