Family Dollar Stores adopted a one-year poison pill with a trigger of 10 percent, two days after activist investor Carl Icahn reported a stake in the company and said he would consider pushing for a merger with Dollar General.
Icahn reported a 9.39 percent stake in the company on Friday, making him its largest shareholder.
Read MoreIcahn takes 9% stakein Family Dollar
The rights plan is not designed to prevent an offer to acquire the company but to allow its board "adequate time to consider any and all alternatives," Family Dollar said on Monday.
"Poison pills" are designed to stop hostile takeover attempts by triggering the issue of new shares that dilute the holdings of investors who exceed a set threshold.
Family Dollar's shares were set to open 12 percent up at $67.76 on Monday after Icahn, known for taking big stakes in companies and pushing for management changes, reported a 9.39 percent stake and told FOX Business he would consider pushing for a merger with Dollar General. (Click here for the latest quote.)
Family Dollar said on Monday it adopted a one-year poison pill with a trigger of 10 percent to allow its board "adequate time to consider any and all alternatives." Jefferies & Co raised its rating on Family Dollar and Dollar General's shares to "buy," based on a potential combination of the two companies and the "enormous synergies" it expects from such a deal.
"We think Dollar General could be a motivated buyer given where we are in the lifecycle of this dollar store industry and potential increased competition in small formats coming from Walmart," analyst Daniel Binder wrote in a note.
Dollar General, whose shares were up almost 8 percent in premarket trading, has been struggling to shore up margins after it slashed prices to keep its lower-income shopper base from being lured by the retail giants. (Click here for the latest quote.)
Family Dollar, struggling under declining sales, said in April it would close 370 stores, slow its expansion of new stores and slash prices to attract customers.
"Sector consolidation makes sense, but management teams have so far resisted," Deutsche Bank analysts said, adding Family Dollar's underperformance to Dollar General presents an attractive opportunity.
There has been repeated speculation since 2011 of a possible merger between the two.
Family Dollar rejected an offer from its third-largest shareholder, activist investor Nelson Peltz-led Trian Partners, to buy the company for at least $7 billion in 2011, which was followed by rumors of a possible deal with Dollar General.
The rumors resurfaced last year after Family Dollar's standstill agreement with Peltz came to an end last July.