Dollar Tree, Family Dollar join forces in $8.5 billion deal

Dollar Tree is buying rival discount store Family Dollar in a cash-and-stock deal valued at about $8.5 billion.

Stockholders of Family Dollar Stores will receive $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share they own. The companies put the value of the transaction at $74.50 per share, which is an approximately 23 percent premium toFamily Dollar's Friday closing price of $60.66.

Family Dollar stockholders will own somewhere between 12.7 percent and 15.1 percent of Dollar Tree's outstanding common shares at closing.

Core customers for bargain stores and major retailers like Wal-Mart have been among the hardest hit by the recession and its aftermath because of job instability.

Family Dollar has struggled and has attempted to reinvigorate sales by lowering prices on almost 1,000 basic items. It's cut some jobs and shuttered underperforming stores. The company had been conducting a strategic review since the winter, and investor Carl Icahn urged Family Dollar last month to put itself up for sale.

Dollar Tree CEO Bob Sasser said Monday that the deal will give Dollar Tree more than 13,000 stores in the U.S. and Canada. That is nearly three times as many stores as Wal-Mart Stores Inc., though Wal-Mart's square footage is still greater.

The combined Dollar Tree-Family Dollar chain will have sales of more than $18 billion and Sasser says that the transaction will create a more diverse company with an enhanced geographic reach.

Dollar Tree stores sell products for $1 or less, while Family Dollar's pricing is much broader.

Dollar Tree will continue to operate under the existing Dollar Tree, Deals, and Dollar Tree Canada store signs. It will keep the Family Dollarbrand as well.

Family Dollar Chairman and CEO Howard Levine will still lead those stores and report to Sasser. He will join Dollar Tree's board.

Dollar Tree plans to finance the deal with available cash, bank debt and bonds.

The boards of both companies have unanimously approved the deal, which is expected to close by early next year. It still needs approval from Family Dollar shareholders.

Shares of Family Dollar Stores Inc., based in Charlotte, North Carolina, surged more than 21 percent before the opening bell. Shares ofDollar Tree Inc., based in Chesapeake, Virginia, are up more than 3 percent.

As Reuters reported early this morning:

Dollar Tree, whose products cost $1 or less, caters to the middle class. While Family Dollar also sells many items priced at $1 or less, it stocks items priced $1-$5 and higher as well.

"This acquisition will extend our reach to lower-income customers and strengthen and diversify our store footprint," Bob Sasser, Dollar Tree's Chief Executive said in a statement.

Dollar stores have struggled in a weak U.S. economy and increased competition from large discount chains such as Wal-Mart Stores Inc, which are increasingly chasing penny-pinching consumers by offering more items priced at $1 or less.

Icahn, Family Dollar's largest shareholder with a 9.4 percent stake, wanted the company to sell itself to DollarGeneral Corp to help it cope with the competition.

Dollar Tree, which said on Monday its offer had been approved by Family Dollar's board, will have about 13,000 stores across the United States and Canada once the deal closes.

Dollar Tree said it secured a bridge financing from JP Morgan Chase Bank N.A. that, along with existing cash and bonds, would be used to finance the deal.

J.P. Morgan Securities LLC is financial adviser to Dollar Tree, and Morgan Stanley & Co. LLC is financial adviser to Family Dollar. (Reporting by Ramkumar Iyer and Devika Krishna Kumar in Bangalore; Editing by Savio D'Souza)"