Billionaire activist investor Carl Icahn and his affiliates bought 10.7 million shares and options for about $265.8 million, according to a June 6 filing with the U.S. Securities and Exchange Commission. Photographer: Scott Eells/Bloomberg

June 9 (Bloomberg) — Family Dollar Stores Inc. facing a threat from billionaire activist Carl Icahn, adopted a shareholder-rights plan that will limit investors from acquiring more than 10 percent of the company.

All but one of Family Dollar’s directors voted for the plan, which will last one year, according to a statement today. Edward Garden, who was added to the board as part of an agreement with shareholder Trian Fund Management LP in 2011, voted against it.

Family Dollar is adding the so-called poison pill after Icahn disclosed he’d amassed a 9.4 percent stake and would seek talks with management — a move that sent the shares up 13 percent. Icahn bought the shares because he plans to push for a merger with Dollar General Corp. according to a person with knowledge of the investor’s thinking. He estimates that such a deal could generate savings of $500 million to $600 million, the person said.

“Carl Icahn is not someone who’s taken lightly,” Anthony Chukumba, a New York-based analyst at BB&T Corp. who has a hold rating on the stock, said last week. “He has a track record.”

Family Dollar shares climbed to $68.62 at the close in New York, marking the biggest gain in more than three years. The stock had slid 6.8 percent this year through the close on June 6, before Icahn revealed his plans.

Previous Offer

Family Dollar, a chain of budget stores based in North Carolina, has been struggling to compete with rival discounters, drugstores and big-box retailers such as Target Corp. and Wal-Mart Stores Inc. To combat slumping sales, the company embarked on a review of its business this year. As part of its turnaround plan, Family Dollar is closing about 370 underperforming stores and opening fewer new ones. It’s also lowering prices in a bid to entice shoppers.

Trian, a firm run by billionaire Nelson Peltz, made a takeover offer for the retailer in 2011 in an attempt to attract other suitors. Family Dollar Chief Executive Officer Howard Levine was reluctant to sell the company his father founded, and no other bidders emerged. The investor ultimately withdrew its offer as part of an agreement that added Garden to the board. Trian remains one of Family Dollar’s biggest shareholders, with a stake of about 7.4 percent.

Icahn and his affiliates bought 10.7 million shares and options for about $265.8 million, according to a June 6 filing with the U.S. Securities and Exchange Commission. He may push for operating changes and ask the company to explore strategic alternatives, as well as potentially seeking board seats, according to a filing. The billionaire hopes “to continue our streak of value enhancement,” he said in a Twitter posting.

‘Reprehensible’ Move

Today he described Family Dollar’s move to limit shareholders to a 10 percent stake “reprehensible.”

“Why does it matter if a large shareholder owns 10 or 15 percent?” he said in a phone interview with Bloomberg Television’s Trish Regan. “All it does is increase fees for lawyers and make friendly discussions more difficult, which also increases fees.”

Icahn believes Family Dollar is undervalued, the person familiar with the matter said. He also sees an opportunity to pressure management since he controls almost 10 percent of the stock and hedge funds have an additional 25 percent, according to the person.

Clorox Misfire

As an activist investor, Icahn has been an antagonist to management at companies such as Apple Inc. Netflix Inc. and Dell Inc. He hasn’t always been successful, though. In 2011, he pushed for a sale of bleach maker Clorox Co. whose brands include Glad trash bags and Hidden Valley salad dressing, even offering to backstop the process with his own bid if a buyer wasn’t found. Clorox rejected his overtures, the highest of which valued the company at $10.7 billion, or $80 a share. Icahn eventually withdrew a proposed slate of directors, saying shareholders wouldn’t support his plan.

He may face similar obstacles in his current quest, said Mark Montagna, an analyst at Avondale Partners LLC in Nashville, Tennessee. It may be hard to find an appropriate suitor, he said.

Dollar General has said it’s not interested in a merger with Family Dollar and Wal-Mart wouldn’t have much use for the company’s stores because they’re too small for its Express format, Montagna said.

Resisting Suggestions

In the meantime, Family Dollar’s turnaround plan will probably take a couple years to execute, he said. Continuing on that path, including its return to everyday low pricing, may be seen as the best course of action, Montagna said.

“I think that Family Dollar will be resistant to some of the suggestions because they’ve been tried,” said Montagna, who has a market perform rating on the shares, the equivalent of a hold. “I doubt that he’s going to bring any new operational solutions to the table.”

Morgan Stanley is serving as Family Dollar’s financial adviser, while Cleary Gottlieb Steen & Hamilton LLP acts as legal counsel.

Activist investors tend to buy at least 5 percent of a company’s stock and flag their intention to actively engage corporate executives and directors by disclosing their holding in a 13D filing with the SEC. Icahn ended an acrimonious battle with EBay Inc. in April, settling to add an independent director and dropping efforts to split off the PayPal payments unit after conversations with EBay CEO John Donahoe.

In this case, it’s too early to tell what kind of impact Icahn may have, if any, BB&T’s Chukumba said.

“It’s interesting, but I don’t think it necessarily means that anything happens,” Chukumba said.

To contact the reporters on this story: Beth Jinks in New York at bjinks1@bloomberg.net ; Lauren Coleman-Lochner in New York at llochner@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Kevin Orland