Billionaire investor Nelson Peltz's bid for Family Dollar Stores Inc underscores growing investor appetite for retailers targeting low-income Americans in a slow economic rebound and has sparked a rally in shares of rivals.
Shares of Dollar General Corp surged 11 percent and Dollar Tree Inc rose more than 3 percent, a day after Peltz's Trian Group proposed to buy Family Dollar in an offer that represented at least a 25 percent premium to its closing price on Tuesday.
The bid for Family Dollar underlines the value of a sector marked by steady operating margins, low cost and resilience to economic swings, several analysts said.
The announcement highlights the positive attributes of the dollar store business model. It is a high returning, low capital intensive business with strong cash flow and low levels of debt on the balance sheet, Credit Suisse analyst Michael Exstein said in a research report on Wednesday.
Retail -- especially at the low end of the sector -- has become a more attractive place for leveraged buyout firms to go shopping. Family Dollar and other low-priced retailers were big beneficiaries of consumers trading down to save money in the downturn.
Private equity firm Kohlberg Kravis & Roberts bought Dollar General in 2007 in a deal valued at $7.3 billion and took it public two years later.
Several analysts said that Dollar General -- with a market value of more than $10 billion and not a likely takeover candidate -- might have to take a serious look at a combination with Family Dollar, although need for significant merger synergies will make such a deal tough to pull off.
Family Dollar, which sells most of its items for $10 or less, is among a slew of other discount retailers that are exploring a sale following expressions of interest, such as Big Lots Inc and BJ's Wholesale Club Inc .
Big Lots has hired Goldman Sachs Group to explore a sale after expressions of takeover interest, a source familiar with the matter said.
BJ's Wholesale Club said earlier this month that it may put itself up for sale, under pressure from a private equity firm that may make a hostile bid.
Shares of Dollar General jumped more than 11 percent to trade at $29.98 on the New York Stock Exchange. Dollar Tree was up more than 3 percent to $52.71 in morning trading on the Nasdaq market, giving it a market value of more than $6.5 billion.
(Reporting by Soyoung Kim; Editing by Steve Orlofsky)