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Icahn Sees New Buyers for Family Dollar After $8.5 Billion Dollar Tree Bid

Tickers in this article: DG FDO
Updated from 2:25 p.m. EDT with analysts' comments

NEW YORK ( TheStreet) -- Dollar General remains a better buyer of Family Dollar according to investors and analysts, even after the latter said on Monday it would merge with Dollar Tree in a $8.5 billion cash and stock deal. But it will take some major fireworks on Wall Street to keep a bumper dollar store trade going.

Family Dollar CEO Howard Levine, the son of company founder Leon Levine, launched a strategic review in the winter of 2013 and after considering a number of bidders and alternatives for the struggling retailer, he began negotiating a merger with Dollar Tree in March. Family Dollar's brand will survive under Dollar Tree with Levine at its head, and Monday's deal is expected to generate large cost savings, helping the company complete a turnaround it began last year.

Both companies' boards of directors and, crucially, hedge fund Trian Management , a long-time investor in Family Dollar that gained a seat on the company's board  in 2011 , approved the merger. While Carl Icahn, Family Dollar's largest shareholder with an over 9% stake wasn't privy to the company's sale process, on Monday he voiced some support for the deal.

Read More:  Dollar Tree Buys Family Dollar for $8.5 Billion in Cash and Stock

"This is a big win for all shareholders of Family Dollar and yet another validation of the activist investment philosophy," Icahn said in a statement. Nonetheless, he continued to press for an alternative deal, noting that other buyers may achieve greater cost cuts. He is "hopeful" that Dollar Tree's offer draws a competing bid.

Wall Street Hopes for More Dollar Store Action

Dollar Tree and Family Dollar's merger began taking shape before the Icahn took his stake in Family Dollar and called for the company's immediate sale, preferably to Dollar General. He wasn't privy to the negotiations that ensued, even if Trian Management, by way of board director Edward Garden, was.

Trian and CEO Levine, who combined own 16% of Family Dollar, will vote in favor of Dollar Tree's offer .

Now, analysts believe Dollar General could yet emerge as a bidder for Family Dollar after years of on-and-off speculation. Such is the extent of Wall Street's craze with dollar stores since the financial crisis.

Dollar General, under then CEO Rick Dreiling, passed on Family Dollar after a cursory look at a merger last fall, according to FBR Capital Markets analyst Dutch Fox. If Family Dollar had run a strong sale process, one that Icahn wouldn't poke holes through, it likely would have informed Dollar General of its emerging deal with Dollar Tree. Meanwhile, Monday's deal comes with a $305 million breakup fee, a steep price for a private equity or strategic buyer.

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