Dollar General's Dreiling: 'We have the playbook' to make Family Dollar deal work

Several analysts upgrade shares

Dollar General Chairman and CEO Rick Dreiling didn't mince words Monday in describing his effort to break up the planned marriage of rivals Dollar Tree and Family Dollar.

Speaking to analysts and investors on a conference call, Dreiling said he and his team are able to complete their proposed $9.7 billion acquisition on the same early-2015 timeframe Dollar Tree is using. Noting that he has in recent years repeatedly approached Family Dollar about a buyout, Dreiling added that the strategic rationale is clear.

"Usually, you hear a merger announced and the line is one plus one equals three," Dreiling said. "This is not one of those occasions. This is one plus one is going to equal two. And the reason is we have the playbook, we have the management team and we have demonstrated the results [...] We know this business and we've demonstrated it. And we're confident this is a matter of doing what we've already been doing since 2008."

Dollar General's operating margins have in recent years hovered around 10 percent while Family Dollar's have slipped from more than 7 percent in fiscal 2012 to 5.2 percent in the last 12 months. Among the areas ripe for improvement Dreiling pointed to Monday were distribution, private-label products and — biggest of all — labor management. On the first of those points, he said Family Dollar's logistics network would mesh well with Dollar General's, allowing the combined company to grow for two to three years without having to build a new distribution center. More broadly, Dreiling said COO Todd Vasos would oversee the Dollar General team tasked with integrating Family Dollar should the company's bid beat out Dollar Tree.

Family Dollar's board on Monday said it would review Dollar General's offer — which is $4 per share higher than Dollar Tree's — but was not changing its recommendation to go with Dollar Tree. But investors and analysts — several of the latter congratulated Dreiling on the call as if the deal already is done — appeared to be leaning heavily toward a Dollar General win: Shares of the Goodlettsville-based company (Ticker: DG) jumped almost 12 percent to $64.14, their highest close since the company went public again in 2009 while Dollar Tree slipped more than 2 percent.

A number of analysts raised their ratings on Dollar General. Edward Westlake at Credit Suisse now has the stock at 'outperform,' up from 'neutral,' while Charles Grom at Sterne Agee hiked his rating to 'buy' from 'neutral,' saying a Family Dollar buyout would over time add more than $1.20 per share to Dollar General's earnings. Grom sees Dollar General climbing to $76, up from his previous target of $58. Similarly, Paul Trussell at Deutsche Bank lifted his rating to 'buy' from 'hold' and hiked his price target to $69 from $60.