Piper Jaffray Comments On Trian Group's Acquisition Of Family Dollar

Piper Jaffray is reiterating its UW rating and $38 PT on Family Dollar FDO following a filing from the Trian Group last night after close stating they will offer $55-60 per share cash for FDO. At the mid-point of the bid, the multiple on EV/F11 EBITDA would 9.2x. Given the high multiple and its view for limited margin expansion, Piper believes a competing bid is very unlikely. Declining income growth for lower-income consumers will limit margin expansion in Piper's view. It believes this multiple is very rich given our view that Extreme Value retailers will have decelerating sales growth given less government stimulus and increased commodity pressures. Additionally, Piper believes the potential for operating margin expansion is limited. According the Piper the takeover could imply potential upside to competition. Piper applied the mid-point of the suggested take-out multiple to a quick analysis of BIG and DLTR to get a rough estimate for upside to current share prices. It notes that this is a simplified analysis and not all companies would command the same multiple, however, based on the closing market price as of 2/15/11, BIG and DLTR showed ~31% upside each to current share prices. FDO is trading higher at $55.15