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Update: Starboard takes stake in Dollar Tree, pushes for Family Dollar sale

Starboard Value LP has built a 1.7% stake in Dollar Tree Inc. and is calling for the sale of the discount retailer's Family Dollar Stores Inc. business, according to the activist investor's letter dated Jan. 7 to Dollar Tree President and CEO Gary Philbin.

Starboard said it wants the discount chain to sell Family Dollar because the unit "has underperformed Dollar General by more than 20%" since its acquisition in 2015. The hedge fund insisted that "the Family Dollar and Dollar Tree banners have not truly been integrated and are largely run independently, both from a store operations and supply chain perspective."

The activist investor is also pushing for Dollar Tree to alter its pricing model, urging it to join competitors in selling some items at price points above $1, such as $1.50 or $2.

In addition, Starboard said it will nominate seven directors for election to the board of the Chesapeake, Va.-based retailer, in order "to ensure true independence of thought" when it comes to testing new strategies.

In response, Dollar Tree noted that Starboard proposed the new directors without seeking any prior engagement or communication with the company, but said its board and committee "will evaluate" the activist investor's nominees if it decides to proceed with its nominations.

The development comes three months after a report that billionaire investor Carl Icahn acquired a "significant" stake in Dollar Tree, sparking speculation that he could push for the sale of Family Dollar. It also comes less than a year after Starboard ended its proxy battle with another consumer company, Sharpie-maker Newell Brands Inc.

J.P. Morgan Securities LLC and Wachtell Lipton Rosen & Katz are advising Dollar Tree on the matter.