Published On: Mon, Jun 9th, 2014

Family Dollar Stores Sets Up Standard Poison Pill Defence Against Carl Icahn

2nd Annual "David Moore's Funny Business Show"

 

Discount retailing company Family Dollar Stores, Inc, which is listed on the New York Stock Exchange, today announced that its Board of Directors has adopted a one-year shareholder rights plan, a.k.a. a poison pill.

It seems the vote of the Company’s directors was unanimously in favour of the adoption of the rights plan, with one exception, namely Edward Garden who voted against the plan.

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The company claims the rights plan, which has a 10% beneficial ownership threshold and may be amended, redeemed or terminated by the Board at any time prior to being triggered, will help the Board protect shareholders against any person or group gaining control of the Company by open market accumulation or otherwise without paying a control premium for all shares.

The plan applies equally to all current and future stockholders and is not designed to prevent an offer to acquire the Company, but rather to allow the Board adequate time to consider any and all alternatives.

This action by Family Dollar is of course aimed directly at activist investor Carl Icahn. Late last week Icahn disclosed he had acquired a 9.39% position in the shares of the discount retail chain.

Icahn also iterated in the filing his mantra that Family Dollar’s shares are undervalued. He stated he believes his involvement can help the company to generate tremendous returns for all shareholders.

 

Family Dollar CEO Howard Levine/ Screen print

 

Discount stores do well in recession, and then can struggle a little once economic recovery actually resumes. Recently, in January Family Dollar even reduced its profit forecast for this current year.

Howard R. Levine, the company’s CEO said in a statement then, “While we have made meaningful progress to improve our execution, our financial performance has not met our expectations.”

He also said, “As previously announced, we are taking steps to strengthen our value proposition, increase operational efficiencies and improve financial performance.”

Then in April the company announced a disappointing second fiscal quarter. For the three months to March 1st, 2014, which is actually the second quarter of its fiscal year, Family Dollar achieved US$2.7 billion in revenues which delivered about US$91 million in net income, down from net income of US$140 million in the same period the previous year as the company struggled with the fall-out of particularly harsh winter.

The company’s shares fell in April in response about 15% compared to the start of the year, though have recovered since and, with the Icahn announcement, have now jumped back up even more to over US$69 per share as of the time of writing. At this price the company currently has a market capitalisation of about US$7.9 billion.

As an activist investor Icahn’s aggressive intent is of course clear, and he will likely now seek to impose his will on the company’s leadership and board of directors, or as he puts it to discuss its business and strategies to enhance shareholder value, including the pursuit of possible operating initiatives or the exploration of strategic alternatives.

Icahn may even ask for Board representation. Activist investor Nelson Peltz’s Trian Fund Management actually made a half-hearted bid for the company as well in 2011, after picking up a 7.9% position. Eventually he went away after the company offered his private equity group a seat on the board.

It is not at all surprising to note, therefore, that the lone dissenting voice on the Family Dollar Board of Directors in voting for today’s poison pill is that of Edward Garden, who is indeed none other than Nelson Peltz’s own nominee on the Board, representing Trian Fund Management and a partner in the firm. Clearly these days, predators must stick together, in what is after all still a jungle out there on Wall Street.

In setting up the poison pill, however, Family Dollar are bolting down the hatches for a prolonged struggle if necessary, while not at all ruling out discussions with shareholders. The have also brought in some heavyweight help too, as Morgan Stanley is acting as financial advisor to Family Dollar for the battle ahead.

The company is also doing what it has to do on the ground to improve its performance on its own. In its second fiscal quarter report it said it would close approximately 370 under-performing stores across the chain, about 4.5% of the total, and also reduce overhead through the adjustment of its workforce.

These efforts will cost money, and entail pre-tax charges to its financial results of between US$85 million and US$95 million which it expects to recognise in this forthcoming second half of its current fiscal year.

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