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June 9, 2014

Family Dollar adopts poison pill

NEW YORK — Family Dollar Stores Inc., facing a threat from billionaire activist Carl Icahn, adopted a shareholder-rights plan that will limit investors from acquiring more than 10 percent of the company.

All but one of Family Dollar's directors voted for the plan, which will last one year, according to a statement Monday. Edward Garden, who was added to the board as part of an agreement with shareholder Trian Fund Management in 2011, voted against it.

Family Dollar is adding the so-called poison pill after Icahn disclosed he'd amassed a new 9.4 percent stake and would seek talks with management - a move that sent the shares up as much as 16 percent. He may push for operating changes and ask the company to explore strategic alternatives, as well as potentially seeking board seats, according to a filing.

"Carl Icahn is not someone who's taken lightly," Anthony Chukumba, a New York-based analyst at BB&T Corp. who has a hold rating on the stock, said last week. "He has a track record."

Family Dollar, a chain of budget stores based in North Carolina, has been struggling to compete with rival discounters, drugstores and big-box retailers such as Target Corp. and Wal- Mart Stores. To combat slumping sales, the company embarked on a review of its business this year. As part of its turnaround plan, Family Dollar is closing about 370 underperforming stores and opening fewer new ones. It's also lowering prices in a bid to entice shoppers.

Trian, a firm run by billionaire Nelson Peltz, made a takeover offer for the retailer in 2011 in an attempt to attract other suitors. Family Dollar Chief Executive Officer Howard Levine was reluctant to sell the company his father founded, and no other bidders emerged. The investor ultimately withdrew its offer as part of an agreement that added Garden to the board. Trian remains one of Family Dollar's biggest shareholders, with a stake of about 7.4 percent.

As an activist investor, Icahn has been an antagonist to management at companies such as Apple, Netflix and Dell. Icahn and his affiliates bought 10.7 million shares and options for about $265.8 million, according to a June 6 filing with the Securities and Exchange Commission. The billionaire hopes "to continue our streak of value enhancement," he said in a Twitter posting.

He hasn't always been successful. In 2011, he pushed for a sale of bleach maker Clorox Co., whose brands include Glad trash bags and Hidden Valley salad dressing, even offering to backstop the process with his own bid if a buyer wasn't found. Clorox rejected his overtures, the highest of which valued the company at $10.7 billion, or $80 a share. Icahn eventually withdrew a proposed slate of directors, saying shareholders wouldn't support his plan.

He may face similar obstacles in his current quest, said Mark Montagna, an analyst at Avondale Partners in Nashville, Tennessee. It may be hard to find an appropriate suitor, he said.

Dollar General Corp., a rival chain, has said it's not interested in a merger with Family Dollar. And Wal-Mart wouldn't have much use for the company's stores because they're too small for its Express format, Montagna said.

In the meantime, Family Dollar's turnaround plan will probably take a couple years to execute, he said. Continuing on that path, including its return to everyday low pricing, may be seen as the best course of action, Montagna said.

"I think that Family Dollar will be resistant to some of the suggestions because they've been tried," said Montagna, who has a market perform rating on the shares, the equivalent of a hold. "I doubt that he's going to bring any new operational solutions to the table."

 

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