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Dollar Tree (NASDAQ: DLTR) bought competitor Family Dollar in 2015. Now, it's selling the chain to a pair of private equity firms at a steep loss. Weirdly, the sale could result in competitor Dollar General (NYSE: DG), still a standalone business, being the big winner from the transaction.
Dollar Tree's expensive mistake
One of the ways that a company can destroy shareholder value is by acquiring other businesses that turn out to be worth considerably less than their purchase prices. Some Wall Street insiders cynically call this process "di-worse-ification." Sometimes, this questionable strategy is driven by a CEO who is hell-bent on building an empire, no matter the cost. Other times, companies are simply trying to find new avenues for growth, and their hopeful efforts just don't pan out as well as they expected.
When Dollar Tree bought peer Family Dollar for roughly $9 billion in 2015, management's idea was that it could find a way to synergistically operate two discount chains with different approaches: Dollar Tree, with its core concept of selling everything in the store for $1 or less, and Family Dollar, with its approach of basically being a low-cost local convenience store.
But last month, Dollar Tree agreed to sell the Family Dollar retail concept to Brigade Capital Management and Macellum Capital Management for just a touch over $1 billion. That fire-sale price suggests that Dollar Tree made a material mistake with its purchase.
Notably, over the decade that Dollar Tree owned Family Dollar, the core Dollar Tree concept expanded to include a wider range of prices and an increasing array of products, like frozen foods. Though their business models are not quite the same, Dollar Tree did begin to look more like Family Dollar. Meanwhile, the Family Dollar brand ended up being a distraction that simply wasn't performing as well as management had hoped it would. It was probably the right idea for Dollar Tree to salvage as much money as it could by selling it.
Dollar General could end up with less competition
Family Dollar and Dollar General are fairly similar retail concepts: Both are attempting to fill the local convenience store niche, like an old five-and-dime, particularly in smaller towns that aren't directly served by big-box stores.
That said, the next steps for Family Dollar are probably going to be dramatic. Managers of public companies have to justify every decision to investors, who can be more focused on near-term impacts to the business and its stock price. Once it goes private, it's possible Family Dollar's new owners will be able to make quicker and larger moves to get the business back into fighting shape. That effort will likely include speeding up the pace of store closures.