Family Dollar Stores Inc FDO.N adopted a poison pill to buy time to consider any possible deal that activist investor Carl Icahn could push for after becoming its largest shareholder.
Family Dollar's move "puts a damper" on prospects for a "friendly dialogue" with the company's executives, Icahn told Reuters on Monday.
Icahn reported a 9.39 percent stake in Family Dollar on Friday and said he was considering pushing the $6.89 billion company to merge with rival Dollar General Corp (DG.N).
"How does it possibly matter if I own 10 percent or 15 percent of a company? All it does is it makes it more difficult to have a friendly dialogue, which we already are planning to have," Icahn said on Monday.
Family Dollar adopted a one-year shareholder rights plan, commonly known as a poison pill, with a trigger of 10 percent.
"Poison pills" deter hostile takeovers by triggering the issue of new shares, diluting holdings of investors who exceed a set threshold.
Family Dollar's shares rose as much as 16 percent to $70.30 on the New York Stock Exchange, while Dollar General's shares rose as much as 14 percent to $65.97.
Jefferies & Co raised its ratings on the stock of both companies to "buy", based on a potential merger and synergies of as much as $1.2 billion.
"We think Dollar General could be a motivated buyer given where we are in the life cycle of this dollar-store industry and potential increased competition in small formats coming from Wal-Mart," analyst Daniel Binder wrote in a note.
Dollar General, which has a market value of $17.59 billion, has been struggling to shore up margins after it slashed prices to keep its lower-income shoppers from shifting to Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).
Family Dollar, struggling with falling sales, said in April that it would close 370 stores, slow its expansion of new stores and slash prices.
Getting antitrust approval will not be an issue as the companies do not sell exclusive goods, an antitrust expert, who asked not to be identified, told Reuters. "I just can't imagine it's a problem."
However, Sterne Agee & Leach analysts ruled out a merger and said taking Family Dollar private might be a better option.
"Dollar General took a hard look at Family Dollar in 2013 and passed on the acquisition. Since that time ... the company has gone out of its way to suggest ... that purchasing Family Dollar is not part of its strategic focus in the near term."
Dollar General CEO Rick Dreiling prefers organic growth over acquisitions and buying Family Dollar would be expensive, Raymond James said.
The company trades at 17.8 times earnings, compared with Dollar General's 15.6 times and an industry median of 15.1 times, according to Thomson Reuters StarMine.
(Reporting by Sruthi Ramakrishnan in Bangalore, Jennifer Ablan in New York and Diane Bartz in Washington; Editing by Don Sebastian and Simon Jennings)