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BOSTON, Sept 11 (Reuters) - Some Dollar Tree Inc investors are crossing their fingers the company doesn't succeed in its $8.5 billion takeover of Family Dollar Stores Inc , saying it could expand and repurchase stock with the $305 million breakup fee while avoiding all the risk of a major acquisition.
The deal announced in July is now under threat after similarly-named but larger rival, Dollar General Corp, outbid it this week with a $9.1 billion hostile takeover proposal. Dollar General had been rebuffed by Family Dollar on previous offers but is seen as likely to win a protracted battle this time.
"I would rather see them (Dollar Tree) walk away, take the breakup fee and continue buying back a substantial amount of shares," said Stephen Goddard, chief investment officer at London Company, a money manager that owns about 1.2 million Dollar Tree shares. Goddard said the money also could be reinvested in new stores.
But if Dollar Tree's bid fails, the company would miss out on an opportunity to more than double its store count and extend its reach to lower-income customers.
Dollar Tree hopes to combine its 5,200 stores with Family Dollar's more than 8,000, a move that would make it a top player in budget retailing in North America. Dollar General, meanwhile, has more than 11,000 stores. It has said it is willing to divest up to 1,500 stores to appease regulators if its takeover of Family Dollar pans out.
Dan Hanson, head of U.S. equities at fund manager Jarislowsky Fraser, said if Dollar Tree doesn't end up with Family Dollar it might still be able to buy stores divested under the rival deal.
"They're in the driver's seat," Hanson said of Dollar Tree. His firm owns more than 1 million Dollar Tree shares, according to public disclosures.
"I don't know how many stores you could buy with the break-up fee, but quite a few," said Chuck Severson, a senior portfolio manager at RW Baird. "You could certainly accelerate store growth with that money."
Dollar Tree does not have as much room to improve its bid for Family Dollar as its larger rival, making it more likely Dollar General's takeover attempt will win out, according to people familiar with the situation.
Severson said he believes Dollar Tree's management team is more than capable of pulling off its acquisition of Family Dollar but added, "I think Dollar General ends up winning."
When Dollar Tree first bid for Family Dollar, Severson said he was surprised and disappointed.
"This was not part of our original investment thesis," said Severson, who oversees the $1 billion Baird MidCap Fund , which owned about 360,000 Dollar Tree shares at the end of June. "We're not enamored with the situation. It will be a huge acquisition and take time and attention away from why we invested in Dollar Tree."
He said the midcap fund and separately managed accounts overseen by RW Baird have cut their overall stake in Dollar Tree in half since the end of June because the takeover attempt raised the company's risk profile.
Sterne Agee analysts agreed that losing the deal could be good for Dollar Tree shareholders. "We believe (Dollar Tree) could commence a very large share buyback program" with the breakup fee, according to a Sterne Agee report on Wednesday. (Reporting By Tim McLaughlin; additional reporting by Olivia Oran and Soyoung Kim in New York.; Editing by Richard Valdmanis and Cynthia Osterman)