Is It Time to Buy Family Dollar's Stock?

Family Dollar‘s stock price has soared 29% since becoming the subject of a takeover battle between two competitors. Dollar Tree and Dollar General are fighting for control of the discount chain, and the outcome has tremendous implications for Family Dollar stockholders.

Given that the stock’s price has risen significantly as a result of the takeover offers, Family Dollar is only attractive if a deal goes through at a higher price than where the stock currently trades. Let’s investigate the chances that investors will profit from buying Family Dollar’s stock today.

Most likely to accept Dollar Tree bid
There are four scenarios that could play out:

1. Dollar Tree’s bid wins.
2. Dollar General’s bid wins.
3. A higher bid is made and accepted.
4. No deal is made.

Family Dollar’s board of directors appears committed to accepting Dollar Tree’s bid. Unfortunately, this is not a favorable scenario for current shareholders.

Dollar Tree announced its bid on July 28; it offered $59.60 per share in cash, and $14.90 in Dollar Tree shares for each share of Family Dollar. The total deal is worth $74.50 per share.

Family Dollar shareholders buying in today will lose out if the Dollar Tree bid is accepted. Family Dollar shares closed on Oct. 3 at $78.22, so accepting the bid at $74.50 would lead to a 4.8% loss for investors who buy at the current price.

Despite the market’s enthusiasm for a higher bid, Family Dollar’s board seems intent on accepting Dollar Tree’s current bid. It has rejected multiple higher bids from Dollar General, citing possible antitrust violations as reasons why the deal could fall apart. As a result, the odds seem to be in favor of a deal being completed at $74.50 — a poor outcome for stockholders buying in at today’s price if they cash out immediately after the deal is done.

Alternative scenarios
Despite the slim odds, one of three other scenarios could take place. First, Family Dollar’s board could change its mind and accept Dollar General’s current bid. The larger rival offered $80 per share in an all-cash deal to acquire Family Dollar. However, even if the improbable happens, and Family Dollar decides to accept this offer, it represents just a 2.3% increase over the current stock price. As a result, this outcome does not provide much upside for the risk taken.

Alternatively, a new and higher bid could come into play. This is the only option that could give current shareholders a decent, quick return. It’s unlikely that Dollar Tree would bid higher than $80 — if it even raises its bid at all — because there’s far less risk that regulators would nix the combination, giving it no reason to top Dollar General’s bid.

More likely, Dollar General would make a higher bid, or Wal-Mart could join the fray. Either case could result in solid gains for Family Dollar’s shareholders, but both are entirely speculative, and therefore not worth hanging your hat on.

Finally, all deals could fall through, and Family Dollar shares could return to their pre-announcement price of about $61. This would result in a 22% drop from its current price — an awful outcome for shareholders. Fortunately, a deal with Dollar Tree seems likely to go through unless shareholders vote against it. Even a vote against the Dollar Tree deal could make Family Dollar shares rise if the board feels compelled to accept the higher bid from Dollar General.

Weighing the possibilities
Family Dollar will most likely be acquired by Dollar Tree in a deal that gives shareholders an immediate 4.8% loss from the current stock price. Barring a higher offer, Family Dollar’s stock has only 2.3% upside in the case that the board accepts Dollar General’s offer.

In a worst-case scenario, Family Dollar’s stock price could drop precipitously if no deal is completed. Even though there’s a possibility that a higher bid will come through, it’s entirely speculative and cannot be counted on. Therefore, Family Dollar’s stock has more downside than upside, making it a poor time to buy.

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The article Is It Time to Buy Family Dollar’s Stock? originally appeared on Fool.com.

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