Professor Ajay Patel Comments on Family Dollar Investments in the Charlotte Business Journal

7.15.2011 Article, Capitalism, Faculty News, Retail

Family Dollar draws investors
Hedge funds steadily boosting their stakes in the discount retailer

Reposted from Charlotte Business Journal | by Jennifer Thomas

A growing roster of activist hedge funds is accumulating shares of Family Dollar Stores Inc.

That could influence the Matthews-based retailer’s business strategy as aggressive investors work to drive up share prices.

Hedge funds tend to have a short investment horizon, notes Anthony Chukumba, senior research analyst at BB&T Capital Markets.

That could mean increased investor input on operational changes, stock-repurchasing programs or threats of takeover in an effort to gain additional investment value, he says.

“It can be a distraction when management wants to run the business,” Chukumba says.

But Family Dollar views the hedge-fund interest as a show of support — and not something to be concerned about, says spokesman Josh Braverman.

In March, the discount chain rejected an unsolicited buyout offer from New York-based hedge fund Trian Group, saying it substantially undervalued the company at $7.6 billion.

“We’re focused on our business and executing our strategic plan,” Braverman says. “I think people see the value in that.”

As of June 30, the 10 largest institutions with equity ownership in Family Dollar held nearly 57 million shares, or more than 45% of the company.

“These investors clearly view this as a vehicle to make money,” says Ajay Patel, professor and GMAC chair in finance at Wake Forest University. Patel is also director of the university’s Center for Enterprise Research and Education.

He notes increased hedge-fund interest often helps attract additional investors. Patel says Family Dollar needs to be vigilant as institutional investors increase their shares.

“They need to be talking to these hedge funds to see what their positions are,” he says.

Family Dollar adopted a shareholder-rights plan, known as a poison pill, after it rejected Trian’s offer. That strategy prevents any investor from obtaining 10% or more of Family Dollar’s stock without company approval, Braverman says.

That reduces the likelihood that an outside group will gain control of the company without its consent.

The largest stakeholder, Pershing Square Capital Management, has upped its stake in Family Dollar since acquiring 5.8 million shares in February.

It now holds nearly 10.9 million shares, or roughly 8.9% of the company’s outstanding shares, according to a Securities and Exchange Commission filing in June.

Pershing Square Chief Executive Bill Ackman declines to comment on his firm’s interest in Family Dollar.

Family Dollar Chairman Howard Levine remains the largest shareholder with 9.7 million shares.

Increased interest by hedge funds can indicate a belief that the company is undervalued, Chukumba says.

“I think part of what makes the dollar stores very attractive right now is the economic environment we’re in,” he says.

Such discount retailers typically perform well when the economy falters. High unemployment rates and a slow recovery from the recession continue to drive consumers to Family Dollar stores, Patel says.

Family Dollar earned $111.1 million in its third fiscal quarter that ended May 28, up 6.5% from a year earlier. Its sales of consumable and home products remain particularly strong.

The company operates about 6,900 stores in 44 states.

Its stock has climbed from $19 in December 2007, when the recession began. Shares of Family Dollar have traded between $35.81 and $56.92 during the last year. It closed at $52.65 Wednesday.