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​In $8.5 billion deal, Dollar Tree to buy Family Dollar

When dollar stores merge, it's not for chump change.

Dollar Tree (DLTR) will pay $74.50 in cash and stock for each share of Family Dollar (FDO), representing a 23 percent premium. The $8.5 billion deal will create a massive discount retailer, with more than 13,000 retail locations in the U.S. and sales of more than $18 billion.

One of the winners in the deal is activist investor Carl Icahn, who had been pushing Family Dollar to sell and had sought to gain seats on the company's board. With the purchase, the value of his 9.4 percent stake appreciated by almost $150 million since Friday. The merger represents a bigger play for the future of discount retailing, which is increasingly crowded as companies vie for consumers' strained pocketbooks.

Another big victor in the deal is Nelson Peltz' Trian Fund Management L.P., which owns about 7.3 percent of Family Dollar. Trian has voted in favor of the acquisition, according to a statement from both companies.

Dollar stores are nearly ubiquitous across the United States, and in some ways represent the modern-day "five-and-dime," chains such as Woolworth's that once offered a wide variety of low-priced items. Those stores faded as big suburban retail chains, including Walmart (WMT), wooed shoppers away from their eclectic offerings.

But dollar stores offer a new take on the five-and-dime, with simple pricing and a grab-bag of household products, from packaged food to party supplies. Just as the variety stores gained popularity in the Depression, dollar stores have caught on as more Americans struggle to make ends meet.

Banking on dollar stores, from an investor perspective, may represent a wager on the decline of the U.S. family. That may seem grim, but the fact is that many Americans are worse off today than they were before the recession. The mean net worth for American households below the 90th percentile dropped by 27 percent between 2007 and 2013, according to a new study from the Russell Sage Foundation.

The combined company will have more retail outlets in the U.S. than Walmart, which counts 4,264 U.S. stores. Still, Walmart's annual sales will continue to dwarf that of the combined Dollar Tree/Family Dollar chain.

Walmart hasn't stood idly by as Dollar Tree, Family Dollar and other dollar-store rivals have muscled in on its territory. Walmart is opening smaller locations in a bid to woo consumers who would otherwise stop in a dollar store.

Family Dollar's stock rose above the offer price in early trading, which Bloomberg cites as evidence that investors may be expecting a bidding war. Dollar General (DG), the biggest U.S. dollar store chain, had earlier been thought to be a potential bidder for Family Dollar, The Wall Street Journal notes.

Icahn had stressed that Family Dollar needed to find a strategic buyer, one that could improve the company's operating metrics, which he wrote in a June letter had "underperformed." "Consolidation in this space is inevitable," he noted.

Dollar Tree, in a statement, said it will focus on looking for operational efficiencies, creating $300 million in synergies by the third year of the deal's closing.