Nelson Peltzs has returned to the food-industry headlines with his bid for US discount retailer Family Dollar Stores

Nelson Peltz's has returned to the food-industry headlines with his bid for US discount retailer Family Dollar Stores

Nelson Peltz, the US activist investor, is no stranger to the food industry.

In the last five years, the billionaire has ruffled feathers at the likes of Heinz, Kraft Foods and Cadbury, buying shares in food manufacturing giants that he believed needed to change strategy.

Peltz spent the summer of 2006 in a battle with Heinz over the company's performance, which he believed was not delivering enough for shareholders. The investor ended up on Heinz's board after a period of acrimony with the company's management and, by November 2007, Heinz looked rejuvenated, with the busness booking a 12% rise in half-year profits.

Earlier in 2007, Peltz bought into the then Cadbury Schweppes and into Kraft and his presence on the share rosters of the two companies was seen as a significant factor in changes at both firms.

Peltz's decision to buy shares in Cadbury Schweppes was widely seen as a catalyst in the UK company's decision to split its confectionery and drinks businesses. The Dairy Milk maker always denied that Peltz was central to that decision and said the move was two years in the making. However, that insistence failed to quell speculation that Peltz, throughout 2007, was putting pressure on Cadbury to improve its financial performance. In the final weeks of the year, Peltz warned Cadbury's management that he would become "more active" if the confectioner did not improve its financial performance. In 2008, Cadbury's sales, earnings and margins all rose.

Kraft's senior management saw Peltz become a shareholder in the US food giant in June 2007 and later that year the company sold its US cereals arm and acquired Danone's biscuits business. Peltz's presence also seemed to have an effect on the composition of Kraft's board, with indepenent directors soon taking up most of the seats around the boardroom table.

Fast-forward to this summer and Peltz appeared once again in the food-industry headlines when his Trian Fund Management investment vehicle bought a near 6.6% stake in US retailer Family Dollar Stores, the discount retailer that runs over 6,800 stores in 44 states. Trian said the stock was "under-valued" and represented "an attractive investment opportunity".

Announcing its investment in a regulatory filing issued on 27 July, the fund also said it had met with Family Dollar chairman and CEO Howard Levine to discuss the business and the strategies that could "enhance value for shareholders".

Tellingly, it added: "During these discussions, the Trian Group communicated its view that there is an opportunity to enhance shareholder value by improving the issuer's operational performance."

Family Dollar's board and management felt compelled to respond publicly and pointed to "nine consecutive quarters of double-digit earnings per share growth, significantly expanded operating margins and improved inventory productivity".

Almost seven months on, Peltz and Trian have tabled a takeover bid for Family Dollar. On Tuesday, Trian, which now owns about 8% of Family Dollar, made an unsolicited offer for the retailer worth US$55 to US$60 a share - a bid that values the company at around $7bn.

Neil Stern, senior partner at US retail consultants McMillanDoolittle, believes Trian has looked at the success that private-equity group KKR had with taking another US retailer - Dollar General - private (in 2007) and then public again (in 2009) and decided to make its move for Family Dollar.

Stern says KKR's strategy with Dollar General was "spectacularly successful". He explains: "KKR modernised the stores, management processes and private brands - and jump-started comps and took it public."

Dollar General went public in November 2009 after an IPO in New York. The business received net proceeds of around $442.5m from the flotation and KKR kept a majority stake in the retailer.

Stern believes that, operationally, Family Dollar can also learn a great deal from Dollar General. He acknowledges the strides that Family Dollar has made but argues the company is behind its rival discount retailer in certain areas.

"While Family Dollar has been performing well, the delta from a store experience and financial performance level relative to Dollar General still exists," Stern says. "There is an opportunity to offer more compelling food, a better private-brand offer and upgraded store experience from where they are today."

Family Dollar's shares soared in the wake of Peltz's offer but retail watchers believe it is far from certain that the investor will succeed in buying the business. Mark Miller, an analyst at William Blair & Co., insists the likelihood that Trian will buy Family Dollar is "low", pointing to the lack of financing, the fact that the value of the bid on the table is a range rather than a specific price.

Miller also argues that, although Family Dollar's board will exercise its fiduciary duty and study the bid, the company is likely to look to stay independent and move to improve shareholder returns through moves including cost-cutting and share buybacks. "CEO Howard Levine's father founded the company, and Family Dollar has a paternalistic culture that we believe would be anachronistic to a leveraged buyout," Miller says.

In fact, Trian's offer has made it more likely that another suitor will bid for the business, believes Miller, although the analyst says the probability of a rival bid remains under 50%. However, Miller says there is "solid industrial logic" behind a merger between Family Dollar and Dollar General, although he cautions that such a move could be "risky" on KKR's part compared to its 2007 acquisition of Dollar General, when profit margins at the business had sunk to 4%.

Elsewhere, there is some doubts over whether Dollar General would bid for Family Dollar. Anthony Chukumba at BB&T Capital Markets estimates that Dollar General still has $3.3bn of debt from when it was taken private by KKR and so would be unlikely to be able to borrow the money to fund a bid. "We also think a stock-financed acquisition is not viable given the current P/E multiple differential between the two companies," Chukuma says.

The BB&T Capital Markets analyst does suggest that Wal-Mart Stores would be "a more likely potential strategic buyer" of Family Dollar than Dollar General. Wal-Mart, Chukumba argues, has endured "a lack of traction with small-box retailing".

Chukumba says: "We believe such a transaction would provide Wal-Mart with immediate scale in small-box retailing, generate substantial synergies, and could provide a platform for additional international expansion."

However, he cautions that the likelihood of Wal-Mart making a move for Family Dollar "is also fairly low, particularly given Wal-Mart's strong historical preference for international acquisitions". Chukumba adds: "Based on our analysis, we would not advise investors to purchase Family Dollar shares in hopes of a higher bid than the current Trian offer, and believe current shareholders may see limited upside potential."

So, where does this leave Family Dollar? Given the family links between the current CEO and the business's founder, and the company's public pronouncements of the progress it has made, it seems likely that the Family Dollar board will look to keep the business independent.

Will this then be the start of a long takeover battle between Trian and the Family Dollar board? Peltz is not an investor to be taken lightly but, as Miller and Chukumba have pointed out, the structure of Trian's current bid (lack of financing and the offer being presented as a range rather than a specific price) has cast some uncertainty on the fund's intentions. Chukumba also notes that a successful Trian bid for Family Dollar would "dwarf" the fund's biggest acquisition in recent years - the $2.3bn purchase of fast-food chain Wendy's in 2008.

Peltz could be looking to pressure the Family Dollar board into greater and faster change but nothing can be discounted.