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Dollar Tree buys Family Dollar (yes, for more than $1)

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Dollar Tree announced on Monday that it is buying rival discount chain Family Dollar for approximately $8.5 billion in cash and stock. The combined company will have 13,000 stores in the U.S. and Canada.

The deal promises big cost-savings as operations are consolidated. Both companies have reported earnings that underperformed analysts’ predictions in recent quarters. Family Dollar has also been under pressure from investor/activist Carl Icahn, who has called for the chain to be sold.

During the recession, consumers flocked to these super-discount stores. But now, says economist Chris Christopher at IHS Global Insight, consumers’ balance sheets are improving, and moderate to middle income families may be drifting away from the deepest discounts.

“Wages are starting to gain a bit of traction,” says Christopher. “And in addition, there is a little bit of migration of people from the discount stores to the middle-tier retailers.”

Christopher says the super-discount stores — all of Dollar Tree’s items sell for $1 or less; Family Dollar has a wider range of goods reaching slightly higher price-points — can’t raise prices very much. So their margins are being squeezed as inflation starts to pick up at the wholesale and retail level.

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