Dollar Tree buys discount rival Family Dollar for $8.5B

Discount store chain Dollar Tree announced Monday that it would buy rival Family Dollar Stores for about $8.5 billion, creating North America's biggest discount retailer.

Shares of Family Dollar, which has been under pressure from activist investor Carl Icahn to sell itself, rose almost 25 percent, to $75.50, in premarket trading. Dollar Tree shares were up 8.8 percent, at $59.

"This acquisition will extend our reach to lower-income customers and strengthen and diversify our store footprint," Bob Sasser, Dollar Tree's chief executive officer said in a statement.

The companies put the enterprise value of the deal, including debt and other costs, at more than $9 billion.

Sasser said Monday that the deal will give Dollar Tree more than 13,000 stores in the U.S. and Canada. That is nearly three times as many stores as Walmart has, though Walmart's square footage is still greater.

Dollar Tree, whose products cost $1 or less, caters to the middle class. While Family Dollar also sells many items priced at $1 or less, it stocks items priced higher as well.

Core customers for bargain stores and major retailers like Walmart have been among the hardest hit by the recession and its aftermath because of job instability.

Family Dollar has struggled and has attempted to reinvigorate sales by lowering prices on almost 1,000 basic items. It has cut some jobs and shuttered underperforming stores.

The company had been conducting a strategic review since the winter, and Icahn urged it last month to put itself up for sale. Icahn has built up a stake in the company of more than 9 percent, according to regulatory filings.

Dollar Tree said it expects to save about $300 million annually by 2018, three years after the deal is likely to close. The company also expects the deal to add to its cash earnings and "generate significant free cash flow, enabling it to pay down debt rapidly."

Dollar Tree will continue to operate under the existing Dollar Tree, Deals and Dollar Tree Canada store signs. It will keep the Family Dollar brand too.

Family Dollar Chairman and CEO Howard Levine will still lead those stores, will report to Sasser and will join Dollar Tree's board.

Wire services