Is Dollarama Inc. About to Be Acquired?

Why Dollarama Inc. (TSX:DOL) could be the big winner in the race to consolidate dollar stores.

| More on:

Things are heating up in the dollar store sector in the United States.

It started in July, when Dollar Tree, Inc. (NASDAQ: DLTR) offered to buy competitor Family Dollar Stores, Inc. (NYSE: FDO) for $74.50 per share, a 25% premium on the company’s closing price. Not to be outdone, yesterday Dollar General Corp. (NYSE: DG) announced an even sweeter bid for Family Dollar, coming in at approximately $78.50 per share.

As I type this, Family Dollar trades at a little above the offer price, at nearly $80 a share. The market anticipates either Dollar Tree coming forward with an even sweeter bid than the $9 billion its competitor already has on the table, or somebody like Wal-Mart Stores, Inc. (NYSE: WMT) coming in and outbidding everyone.

It’s obvious that the dollar store story in the United States is now one of consolidation. The sector experienced terrific growth after the 2002 and 2008 recessions, as cash-strapped customers looked for the lowest price possible on necessities. Thousands of stores opened up across the country. Now, sales are flat at best, and companies in the sector just aren’t growing anymore.

Which is why the loser of this battle should look to Dollarama Inc. (TSX: DOL) as a consolation prize.

Of course, calling Dollarama a consolation prize is a disservice to the terrific job its management has done. The chain currently boasts more than 800 stores, with another 100 scheduled to open over the next couple of years. Same-store sales growth is terrific, coming in at 3.3% in the most recent quarter, with overall sales up 12%. Earnings were up 25% compared to last year, and margins grew fatter as well.

Considering the tough Canadian retail environment, those are some terrific numbers.

Unlike in the U.S., Canada’s dollar store format still has plenty of room for growth. One analyst predicted that Canada could support more than 1,700 dollar stores over the medium to long term — about a 50% growth potential. Based on that, U.S.-based dollar stores should be practically salivating at the opportunity.

Of course, Dollar Tree is already in Canada, thanks to its 2010 acquisition of Dollar Giant, a small operator with 80 stores. Growth has been somewhat slow — at least, slow compared to Dollarama’s blistering pace — but Dollar Giant has grown to more than 180 locations across Canada. At least one of the American players sees the potential in Canada.

There are two possible ways this could end.

The first one is that Dollarama simply gets acquired by whoever loses out on the Family Dollar sweepstakes. Dollarama’s current market cap is $6.2 billion, meaning the winner would spend approximately the same amount of cash to acquire it as would have been spent to acquire Family Dollar, once you factor in the premium that would need to be paid.

Dollar General is the logical choice to acquire Dollarama, since Dollar Tree already has a presence in Canada. Dollar Tree buying out Dollarama would give it a dominant position in the market — one the feds might not be interested in granting to a foreign owner.

As it stands right now, Dollar General is in the lead for Family Dollar. If it does go through with this acquisition, it won’t buy Dollarama. The logical response to that is Dollar Tree investing to beef up its presence here and opening new stores aggressively. This could end up hurting Dollarama, at least in the short term.

Dollarama is a terrific company, and is truly one of Canada’s best retailers. If I were Dollar General’s management and I lost out on Family Dollar, I’d immediately try to acquire Dollarama. If that happens, investors who buy now are going to be very happy. If not, look for weakness as competition heats up.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Nelson Smith has no position in any stocks mentioned.

More on Investing

Solar panels and windmills
Energy Stocks

How Brookfield Renewable Stock Gained 40% in a Month

Brookfield Renewable stock (TSX:BEP.UN) surged in share price from a landmark deal and strong earnings, leading to a 40% jump.

Read more »

money cash dividends
Dividend Stocks

2 Under-$10 Dividend Stocks I’d Buy Right Now

Here's why low-cost dividend stocks such as Decisive Dividend should be part of your shopping list in 2024.

Read more »

Canadian Dollars
Dividend Stocks

5 Stocks You Can Confidently Invest $500 in Right Now

These five stocks are all some of the top businesses in Canada, making them stocks you can buy confidently in…

Read more »

A worker drinks out of a mug in an office.
Dividend Stocks

Worry-Free Dividends: 3 Stocks for Canadian Investors

These three Canadian stocks can help you earn worry-free dividends irrespective of market conditions.

Read more »

movies, theatre, popcorn

Cineplex Stock Looks Like a Steal at $8 and Change

Cineplex (TSX:CGX) stock is starting to look like a great deal as it looks to add to its recent swing…

Read more »

Woman has an idea
Dividend Stocks

The Smartest TSX Dividend Stocks to Buy With $1,000 Right Now

Here's why blue-chip TSX dividend stocks such as BAM and BMO should be a part of your shopping list in…

Read more »


The Top 5 Movers on the TSX in May

If you're looking for the best of the best, these five have been the top performers in May of this…

Read more »

stock data
Dividend Stocks

TFSA Pension: 1 Great Canadian Dividend Stock to Own for Growing Passive Income

This TSX dividend stock is down 35% from the 2022 high. Is it finally oversold?

Read more »