Dollar Tree cash, debt grew in fiscal Q2 on Family Dollar acquisition

By Paul Deckelman

New York, Sept. 1 – Dollar Tree, Inc. closed out its 2015 fiscal second quarter on Aug. 1 with more cash on its balance sheet than a year ago – but also with considerably more debt, both as a consequence of the Chesapeake, Va.-based discount retailer’s successful $9 billion-plus acquisition of sector peer Family Dollar Stores, Inc., which closed on July 6.

During Dollar Tree’s conference call Tuesday following the release of its results for the quarter, its chief financial officer, Kevin S. Wampler, noted that the newly enlarged company had combined cash and cash equivalents at quarter’s end of $1.30 billion, nearly triple the $467.7 million that it had at the end of the fiscal second quarter of 2014.

The cash balance was also up from $864.1 million at the end of the 2014 fiscal year on Jan. 31.

The company’s debt level meanwhile ballooned out to nearly $8.35 billion at the end of the latest quarter, consisting of $8.27 billion of long-term debt less the current portion and $83 million of current-portion debt.

That was up substantially from the $682.7 million of debt it was carrying at the end of fiscal 2014 and the $740.2 million of debt on the year-ago balance sheet.

Debt deals fund acquisition

The huge increase in debt was directly attributable to the Family Dollar acquisition.

Dollar Tree and Matthews, N.C.-based Family Dollar announced plans for the $74.50 per share cash-and-stock acquisition in July 2014, aiming to create a 13,000-store retailing behemoth that would operate in every U.S. state other than Alaska and Hawaii plus five Canadian provinces.

Under the terms of the agreement, Dollar Tree would pay Family Dollar shareholders $59.60 in cash and 0.2484 of a share of Dollar Tree common stock for each share of Family Dollar common stock. Dollar Tree would also assume about $485 million of Family Dollar’s debt.

Net of $307.4 million of cash in Family Dollar’s coffers that it acquired in the deal, Dollar Tree ended up paying $8.80 billion for Family Dollar, or about $6.53 billion in cash and $2.27 billion in its own common stock.

The deal had been expected to close earlier this year; it finally went through – though considerably after the originally anticipated timeframe – after Family Dollar, supported by key shareholders such as investor Nelson Peltz's Trian Fund Management LP, rejected a competing, and actually higher, offer from another sector peer, Goodlettsville, Tenn.-based Dollar General Corp., believing that potential anti-trust problems from such a combination would make a Dollar General transaction with Family Dollar ultimately untenable. As it was, Dollar Tree – with 5,282 stores of its own – was still forced to divest 330 of Family Dollar’s 8,200 stores to satisfy regulatory concerns.

In order to swing the acquisition, Dollar Tree did a multi-pronged financing effort, utilizing both high-yield bonds and bank debt.

It priced an upsized $3.25 billion of new notes in two tranches on Feb. 6. The regularly scheduled forward calendar offering from Family Tree Escrow LLC, which would be merged with and into Dollar Tree, consisted of $750 million of 5¼% senior notes due 2020 and $2.5 billion of 5¾% senior notes due 2023, both of which priced at par. The offering was originally planned as a single $2.5 billion tranche of eight-year notes but was restructured and enlarged with the addition of the five-year piece of paper.

In the bank debt market, the company concurrently entered into a new $1 billion five-year senior secured term loan A tranche, upsized from $500 million originally, that priced at 225 basis points over Libor, and a $3.95 billion senior secured seven-year term loan B tranche, downsized from $5.2 billion originally, which priced at 350 bps over Libor with a 0.75% Libor floor. It also entered into a new $1.25 billion five-year senior secured revolving credit facility priced at Libor plus 225 bps, which was undrawn at the time of pricing.

In June, Dollar Tree refinanced the $3.95 billion term loan B portion of its acquisition financing, entering into a new $3.3 billion floating-rate term loan B-1 bearing interest at Libor plus 275 bps with a 0.75% floor plus a $650 million fixed-rate 4¼% term loan B-2. The interest rate on the term loan A tranche and the revolver were left unchanged.

As of the end of the fiscal quarter on Aug. 1, the revolver remained undrawn.

Family Dollar debt assumed

As part of the acquisition, Dollar Tree assumed and left outstanding Family Dollar’s $300 million of 5% senior notes due 2021 that the company had issued in 2011.

It also assumed the liability for Family Dollar's $185.2 million of private placement senior notes that were scheduled to come due this Sept. 27 and for Family Dollar's revolver facility. Following the acquisition, Dollar Tree repaid the $185.2 million outstanding under the Family Dollar private placement notes and terminated the revolver.

At the close of the transaction, it also used a portion of the financing to prepay in full $750 million of its own outstanding senior notes, consisting of $300 million of 4.03% series A senior notes due 2020, $350 million of 4.63% series B senior notes due 2023 and $100 million of 4.78% series C senior notes due 2025 plus accrued interest and a make-whole premium of about $89.5 million.

During the conference call, CFO Wampler said that the company had racked up net interest expense of $263.9 million in the quarter, versus $8.4 million in the prior year’s second period, which included interest on the long-term debt needed for the acquisition, the $89.5 million fee related to the prepayment of the existing Dollar Tree senior notes and a $39.5 million prepayment fee related to the term loan B refinancing as well as a $17.4 million write-off of original issue discount and a $5.9 million write-off of deferred financing costs related to the term loan B refinancing.

He said that the quarterly run rate for interest expense going forward will be about $100 million, including deferred financing cost amortization.

Sales up after acquisition

For the latest quarter, total sales – reflecting one month of Family Dollar’s sales included with those of the company’s own Dollar Tree stores – jumped to $3.01 billion from the pre-merger company’s $2.03 billion a year ago.

It posted a net loss for the latest period of $98 million, or 46 cents of red ink per diluted share, versus a year-ago profit of $121.5 million, or 59 cents per share.

On an adjusted basis, excluding interest costs and sales, general and administrative expenses related to the Family Dollar acquisition, Dollar Tree earned $53.5 million in the second quarter, or 25 cents per share, versus its year-ago adjusted earnings of $126.1 million, or 62 cents per share.

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