Dollar General Corp., fighting to maintain its lead in the industry, raised its bid for Family Dollar Stores Inc. (FDO:US) and threatened to take the offer directly to investors if it gets rejected again.
Dollar General bid $9.1 billion, or $80 a share in cash, compared with an offer of $78.50 made two weeks ago that was rebuffed on antitrust concerns. Dollar General said it would sell as many as 1,500 locations, up from 700 in its previous approach, and pay Family Dollar $500 million if the deal fails on regulatory approval.
Today’s sweetened proposal escalates a bidding war against Dollar Tree Inc. (DLTR:US), which had won over Family Dollar with a July offer of $8.5 billion, or $74.50 a share -- a deal seen as more friendly to antitrust regulators. If that merger goes ahead, Dollar General risks losing its spot as the largest dollar-store chain just as Wal-Mart Stores Inc. pushes into the market with smaller-format stores.
“Family Dollar definitely has some more thinking to do,” said Poonam Goyal, a senior retail analyst for Bloomberg Intelligence. By increasing the stores it is willing to divest, Dollar General is “definitely showing that it wants to make this deal happen.”
Family Dollar, based in Matthews, North Carolina, rose 0.5 percent to $80.22 at the close in New York. The stock had been trading above Dollar General’s rejected offer, a sign that investors expected the chain to raise its bid. Dollar General, based in Goodlettsville, Tennessee, gained 0.6 percent to $64.36 while Dollar Tree advanced 1.6 percent to $54.46.
“Family Dollar’s board of directors, in consultation with its legal and financial advisers, will review and consider the revised proposal,” the company said in a statement today.
Randy Guiler, a spokesman for Dollar Tree, declined to comment.
Dollar Tree could match Dollar General’s offer or come close to $80 a share and say there would be fewer regulatory hurdles, said Patrick McKeever, managing director with MKM Partners in Stamford, Connecticut.
Dollar General is likely to win the bidding war because, unlike Family Dollar, it can make an offer in the mid-$80s and still increase earnings per share, said McKeever. He recommends buying shares of Dollar General and Dollar Tree while holding Family Dollar.
Absent a counterbid from Dollar Tree, “it would be difficult” for Family Dollar’s board to turn down the better offer from Dollar General, McKeever said.
The pursuit of Family Dollar has created tension between it and Dollar General. The companies have publicly traded barbs, accusing each other of misstating facts surrounding a meeting on June 19 to discuss a possible combination.
Family Dollar has painted a picture of Dollar General as an unserious suitor that only decided to bid after discovering its rival’s offer and hasn’t adequately addressed antitrust issues. Dollar General, meanwhile, is portraying Family Dollar’s leadership as more interested in its own well-being than that of its shareholders.
One remaining obstacle may be that Dollar General’s offer doesn’t ensure a place for Family Dollar Chief Executive Officer Howard Levine at a combined company, Goyal said. As part of Dollar Tree’s deal to buy Family Dollar, which was announced on July 28, Levine would continue running the chain his father founded and report to Dollar Tree CEO Bob Sasser. Meanwhile, Dollar General CEO Rick Dreiling declined to comment on Levine’s future role when asked last month.
In today’s letter to Family Dollar’s board laying out the new offer, Dreiling said the chain increased its antitrust analysis by hiring Richard Feinstein, the former director of the Bureau of Competition for the Federal Trade Commission, to review the work. Feinstein, who now works for law firm Boies, Schiller & Flexner LLC, concluded the transaction can be completed, based on the first offer, Dreiling said.
“Given the details of our revised proposal, we are certain that you will conclude that our revised proposal” is superior, Dreiling said in the letter. And if Family Dollar doesn’t, Dollar General will consider making a hostile bid, he said.
The battle for Family Dollar began after activist investors Carl Icahn and Nelson Peltz took large stakes in the retailer and pushed for a sale. Icahn still owns about 3.6 percent of the shares.
Meanwhile Peltz’s Trian Fund Management LP has a 7.3 percent stake as the second-largest shareholder after Levine. Trian also has a seat on its board, providing incentive to seek the highest offer. Ed Garden, co-founder of the investment firm, serves on the committee overseeing the sale process.
Of the two potential suitors, Dollar General offers the most opportunity for cutting costs because the companies have such similar business models, Goyal has said. That’s also why there’s more concern over the FTC approving the deal.
Both Family Dollar and Dollar General offer a variety of food and consumer goods at multiple prices and cater to low-income shoppers. Dollar Tree, in contrast, attracts more middle-class consumers and sells most items at $1.
Dollar General’s projection for $600 million in annual cost savings from the merger is twice what Dollar Tree estimated in its deal to buy Family Dollar.
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