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Family Dollar rejects Dollar General’s revised buyout offer

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The fight over Family Dollar intensified Friday as the Matthews-based retailer rejected the latest unsolicited buyout bid from rival Dollar General and accelerated its planned merger with another company.

Family Dollar said its board of directors spurned Tennessee-based Dollar General’s latest buyout offer due to continued concerns over antitrust issues.

The announcement came just three days after Dollar General increased its offer for Family Dollar and added safeguards aimed at soothing Family Dollar’s concerns that the deal would run afoul of federal antitrust regulations.

Family Dollar remained unconvinced.

“Our board of directors, with the assistance of outside advisers and consultants, reviewed all aspects of Dollar General’s revised proposal and unanimously concluded that it is not reasonably likely to be completed on the terms proposed,” CEO Howard Levine said in a statement. “There is a very real and material risk that the transaction proposed by Dollar General would fail to close, after a lengthy and disruptive review process.”

The board reaffirmed its support for a deal with Virginia-based Dollar Tree, which Levine said “delivers attractive value in the form of immediate upfront cash and upside participation in a combined Dollar Tree-Family Dollar entity, as well as closing certainty.”

Family Dollar and Dollar Tree, in news releases issued Friday morning, said they are accelerating their timeline to close their deal, expecting to do so by the end of November rather than early next year as previously indicated.

Family Dollar announced in July that it had reached agreement on a $74.50 per-share cash-and-stock deal with Dollar Tree. But larger rival Dollar General last month offered to buy Family Dollar in a $78.50 per-share all-cash deal.

Family Dollar rejected Dollar General’s offer four days after the unsolicited bid first emerged. On Tuesday, Dollar General increased its offer to $80 per share and said it would be willing to divest itself of as many as 1,500 stores to avoid problems with federal antitrust regulators.

Family Dollar said Friday that that still isn’t good enough. Its officials believe regulators will require Dollar General to sell more stores than that, potentially holding up a deal.

The law firm of Cleary Gottlieb, which represents Coca-Cola and other large corporations on mergers and acquisitions, is advising Family Dollar.

Dollar Tree and Family Dollar use different retail strategies – everything at Dollar Tree sells for $1, while Family Dollar has many price points. Dollar General, on the other hand, has a business model virtually identical to Family Dollar.

Family Dollar contends the overlap between its model and Dollar General’s makes it more likely antitrust regulators will frown on a deal with Dollar General.

Dollar Tree on Friday said it is willing to divest itself of as many stores as necessary to obtain approval from federal regulators. Family Dollar and Dollar Tree said they expect the Federal Trade Commission to request more information on their deal next week, but added that they ultimately expect approval.

The Dollar Tree deal, as amended, “is clearly superior to Dollar General’s revised proposal based on antitrust risk, deal certainty and time value of money,” Dollar Tree CEO Bob Sasser said in a statement. “Unlike Dollar General, we expect to be required to divest few, if any, stores because our business model is significantly different from Family Dollar’s model.”

Dollar General said Friday that it is evaluating next steps, and remains committed to acquiring Family Dollar. The firm has previously said if Family Dollar’s board doesn’t enter into discussions on its deal, it will take its offer directly to Family Dollar’s shareholders.

BB&T Capital Markets analyst Anthony Chukumba and associate Dan Cannata said in a research note to clients that they were surprised Family Dollar turned down Dollar General’s revised offer.

They said Family Dollar remains a “must have” for Dollar General since Dollar General’s multiyear turnaround plan has petered out and Dollar General would face stiffer competition from a combined Dollar Tree-Family Dollar firm.

“While we are hard pressed at this point to predict the next chapter in this ongoing soap opera, we think Dollar General is likely to come back to the table with a revised proposal,” they wrote.

Dollar General CEO Rick Dreiling, in fattening his firm’s offer this week, had suggested that a federal antitrust analysis would focus not on his firm’s competition with Family Dollar, but instead would center on Wal-Mart, the main driver of Dollar General’s strategic and pricing decisions.

Dollar General has hired Richard Feinstein, former director of the Federal Trade Commission’s antitrust enforcement bureau, to review the company’s analysis. The company said Feinstein agreed with its belief that its original offer would have withstood scrutiny.

Dollar General has said it will pay a $500 million reverse breakup fee to Family Dollar should antitrust regulators block it.

Family Dollar’s press release quoted one of its board members, Ed Garden, as saying the breakup fee holds an after-tax value of less than $3 a share and “does virtually nothing to compensate the Family Dollar shareholders for assuming that risk” of antitrust troubles.

Garden is co-founder of Trian Fund Management, a major Family Dollar shareholder. The BB&T Capital Markets analysts said Family Dollar’s board must be deeply concerned about the antitrust issues, since Trian would potentially leave $46 million on the table by staying with the Dollar Tree offer.

The stakes are also high for Family Dollar’s 1,400 Matthews-based corporate employees.

The proposed Dollar Tree deal envisions Dollar Tree and Family Dollar keeping many of the corporate jobs in Matthews. Levine would stay on at the combined company for at least two years, reporting to Dollar Tree’s Sasser. Dollar Tree also plans to keep the Family Dollar name on many of the combined company’s stores.

Dollar General hasn’t said what it might do with the Matthews headquarters jobs or the Family Dollar name, or what Levine’s role would be. Analysts say a deal with Dollar General likely means a dismantling of the Matthews headquarters.

One employee who asked to remain anonymous said workers are worried, and turnover is increasing.

“Morale is definitely down at headquarters,” said the worker, who wasn’t authorized to speak publicly about the situation. “There is a lot of anxiety and trepidation. But nobody has let their foot off the gas. We want to serve the customers.”

Family Dollar stock closed down about 1 percent at $79.11 per share.

Staff writer Rick Rothacker contributed.

Frazier: 704-358-5145; Twitter: @Ericfraz
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