Dollar General’s offer to buy Matthews-based Family Dollar in a $9.7 billion deal raises the stakes for Charlotte – casting doubt on a pending acquisition by another rival and spurring talk of potentially deep layoffs at one of the city’s most prominent homegrown retailers.
Tennessee-based Dollar General announced Monday it would pay $78.50 a share for Family Dollar in an all-cash deal. That’s $4 a share, or 5.4 percent, higher than the offer by Virginia-based Dollar Tree, which Family Dollar agreed to last month.
One analyst said a Dollar General deal could mean heavy layoffs at Family Dollar’s Matthews headquarters, home to some 1,400 corporate employees.
Dollar Tree and Family Dollar have very 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 that’s virtually identical to Family Dollar. That means more duplicate functions could be cut in a merger, said Brian Yarbrough, an analyst with Edward Jones.
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Should such a deal win acceptance from Family Dollar shareholders, he said, it could close sometime early next year. Yarbrough said he’d expect to see significant layoffs in Matthews by the end of 2015.
“A lot of jobs are definitely in jeopardy. I think it’s unfortunate because a lot of people worked very hard to help Family Dollar try to turn things around,” Yarbrough said. “But as far as the Family Dollar headquarters, I don’t think there will be much of it left after the deal closes.”
The proposed Dollar Tree deal, announced July 28, envisions a different scenario: Dollar Tree and Family Dollar have said they expect to keep many of the corporate jobs in Matthews, and that Family Dollar CEO Howard Levine would stay on at the combined company for at least two years. He would report to Dollar Tree CEO Bob Sasser. Dollar Tree also plans to keep the Family Dollar name on many of the combined company’s stores.
Dollar General didn’t say early Monday what it might do with the Matthews headquarters jobs or the Family Dollar name, or what Levine’s role would be.
“It’s a little soon for all of that right now,” Dollar General CEO Rick Dreiling told analysts when asked whether the company would keep the Family Dollar brand. “We’re more focused on the inside of the box as opposed to what the sign is on the outside.”
Family Dollar issued a statement confirming it received Dollar General’s offer and said the board of directors will “carefully review and consider the proposal.” But Family Dollar declined to comment further, and executives were not available to speak, a spokeswoman said.
A Dollar Tree representative declined to comment.
Bidding war possible
Dollar General’s bid raises the possibility of a bidding war with Dollar Tree.
Dreiling told investors that Dollar General’s offer is a better deal for Family Dollar’s shareholders because it has a higher price and doesn’t include stock. Dollar Tree’s cash-and-stock deal includes $59.60 a share in cash and $14.90 worth of Dollar Tree stock for each share of Family Dollar.
“Coupled with the certainty of an all-cash offer, we believe our proposal is far superior for Family Dollar shareholders,” Dreiling said during a conference call. “We believe that Family Dollar’s board and management team will recognize the superiority of our proposal.”
Dollar General told investors Monday it expects to generate at least $550 million worth of savings by combining with Family Dollar.
Wayne Hood, an analyst with BMO Capital Markets, said he believes Dollar General can afford to bid as high as $85 per share.
“We would not be surprised if (Dollar Tree) were to make a counteroffer, but it could be difficult to make a superior all-cash bid much above $80 per share without more synergy savings.”
Erik Gordon, a business professor at the University of Michigan’s Ross School of Business, said Dollar Tree has seemed more motivated to buy Family Dollar, but Dollar General can afford to pay more.
“In the end, I think Dollar General can put more money on the table, and those are the guys who usually win,” Gordon said.
Almost 20,000 stores
Family Dollar’s stock rose nearly 5 percent Monday, closing at $79.81 – more than $1 above Dollar General’s offer price. That could indicate some buyers anticipate yet another competing offer for the Matthews retailer.
Dreiling said he would postpone his planned May 2015 retirement for a year to make the acquisition work, removing what analysts had said was one of the major stumbling blocks to a Family Dollar-Dollar General deal. Dollar General also offered to pay the $305 million breakup fee Family Dollar would owe Dollar Tree, and Goldman Sachs and Citigroup have committed to financing Dollar General’s bid.
Dollar General’s proposal would create the nation’s largest discount variety retailer. Dollar General is No. 1 in the category, trailed by Family Dollar. The combined company would have almost 20,000 stores, $28 billion in revenue and more than 160,000 employees.
Dollar General said Monday that it has already analyzed antitrust requirements and is ready to divest up to 700 stores to satisfy regulators and make the deal work.
“We don’t believe antitrust is a matter of concern,” Dreiling said. “We think it’s very manageable.”
Family Dollar was founded in Charlotte in 1959 by Leon Levine, now a major local philanthropist. The company has grown to operate more than 8,100 stores nationwide.
Family Dollar CEO Howard Levine is Leon Levine’s son and the company’s largest shareholder, with about 8.2 percent of shares outstanding. He has already committed to vote his shares in favor of the Dollar Tree deal.
Under the Dollar General deal, Howard Levine’s shares would be worth more than $730 million.
Dreiling addressed Levine directly in a letter sent Monday, which Dollar General released.
“As you know, we at Dollar General admire your company and its attractive footprint and business prospects,” Dreiling wrote. “This matter has my highest priority and I look forward to hearing from you.”
Gordon, the University of Michigan professor, said Levine’s ability to influence the outcome of the bidding war is likely hampered by what has been seen as less-than-impressive performance by Family Dollar in recent years.
“The CEO at Family Dollar is probably not viewed by the stockholders as somebody you have to keep happy at all costs,” Gordon said.
Activist investor Carl Icahn and other investors have pushed Family Dollar to sell itself off and on for several years. The retailer has lagged its competitors in growing revenue and profits.
Family Dollar has taken steps to improve its results this year, including announcing the closure of 370 underperforming stores, shaking up its executive ranks, adding alcohol sales and slashing prices on 1,000 items.
In explaining Family Dollar’s challenges, Levine said earlier this year that the chain’s predominantly low-income customers are still feeling pinched by a weak economy and cuts to federal food stamp benefits. But Dollar General, targeting the same customer base, has fared better.
Icahn pushed for a combination with Dollar General, not Dollar Tree. But while he began publicly agitating for a sale of the company in June, securities filings show Family Dollar had already had preliminary talks with a competitor, described only as “Company A,” as far back as February 2013.
That company appears to have been Dollar General because securities filings describing the talks say Icahn was supportive of Family Dollar combining with “Company A.” That matches Icahn’s public statements about Dollar General.
But “Company A” grew skittish and decided not to pursue a deal with Family Dollar after Icahn – known for his aggressive tactics – got involved, according to securities filings describing how the Dollar Tree deal came together.
Dreiling said Monday that he hadn’t known Family Dollar was in play, and that he was caught off guard by the announcement of the Matthews retailer’s deal with Dollar Tree. He said Dollar General had “expressed interest in a combination with Family Dollar a number of times over the last few years.”
“Suffice it to say for someone who was supposedly involved in the process, we were very surprised by Family Dollar’s announcement with Dollar Tree,” Dreiling told investors and analysts. “There was no one more surprised than us.”
“If I had thought this asset was in play, I probably wouldn’t have announced my retirement,” Dreiling said. “Having said all that, it’s water under the bridge. What we’re here to do right now is get our merger agreement with Family Dollar.”