Jefferies Upgrades Dollar General (DG) and Family Dollar Stores (FDO) to Buy on Potential Merger Following Icahn 13D

June 9, 2014 6:39 AM EDT
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Price: $79.39 --0%

Rating Summary:
    0 Buy, 23 Hold, 4 Sell

Rating Trend: = Flat

Today's Overall Ratings:
    Up: 13 | Down: 22 | New: 54
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Jefferies upgraded both Dollar General (NYSE: DG) and Family Dollar Stores Inc. (NYSE: FDO) from Hold to Buy with price targets of $75 and $79, respectively, based on the potential for a deal that results in a combination and large synergies are realized.

"A recent 13D revealed that Icahn Capital LP has accumulated a 9.4% stake in FDO. With multiple activists holding big positions, we could see FDO respond to shareholder pressure by changing management and board members or putting the company up for sale," analyst Daniel Binder notes.

He added, "This upgrade is based on a potential combination of Dollar General and Family Dollar and the enormous synergies we see as a result. We think synergies could be in the range of $950 million- $1.2billion. This would put EPS for DG at about $5.50-6.00 versus our current estimates of $3.51 for this year. Icahn Capital LP filed a 13D on Friday evening indicating it has taken a 9.4% stake in FDO. Icahn Capital has indicated that it intends to discuss with Family Dollar’s senior management and Board, its strategies to enhance shareholder value, including the pursuit of operating initiatives or the exploration of strategic alternatives. It may also seek shareholder board representation if appropriate. If the outcome of shareholder pressure is Family Dollar board and management changes and no deal comes to pass, DG would be less interesting, since we view it as fairly valued as a standalone company at current levels. Our 12-month $75 price target is based on shares selling at about 19x our FY16 (Jan 16) EPS estimate of $3.98 (pre deal) or 10.6x EV/EBITDA. This reflects the prospects of a deal getting done, which includes potential synergies we have built in for first year."

For an analyst ratings summary and ratings history on Family Dollar Stores Inc. click here. For more ratings news on Family Dollar Stores Inc. click here.

Shares of Family Dollar Stores Inc. closed at $60.53 yesterday.

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