Discount retailer Dollar General went private in 2007, revamped operations and emerged stronger than Matthews-based rival Family Dollar Stores.
Could Family Dollar have followed a similar path?
According to documents reviewed by the Observer, Family Dollar – now being acquired by Dollar Tree – explored the possibility of going private around the same time as Dollar General, with the same private equity firm.
In early 2007, Family Dollar CEO Howard Levine met with a representative of private equity firm Kohlberg Kravis Roberts at the now-defunct Aquavina restaurant in uptown Charlotte, according to a person familiar with the matter. One topic was a Family Dollar combination with Dollar General, the documents suggest.
Such a combination would have created a formidable discount giant, powered by an investment from KKR, the big buyout firm best known for its battle to buy RJR Nabisco in the 1980s.
But for reasons that aren’t clear, it never happened. Instead, KKR announced in March 2007 a $7.3 billion deal to take just Tennessee-based Dollar General private.
Family Dollar soldiered on as a public company, facing increasing scrutiny from investors as the company fell behind its competitors. By last year the company found itself a takeover target, with offers from Dollar Tree and Dollar General. Virginia-based Dollar Tree ultimately prevailed, in a deal that could close this month.
The documents, which have never been publicly disclosed, provide a window into behind-the-scenes dealings at one of the Charlotte area’s best-known companies. They raise the possibility of intriguing what-if scenarios that could have had major implications for a trio of dollar-store rivals: Family Dollar, Dollar General and Dollar Tree.
Meeting at Aquavina
In early 2007, Family Dollar and Dollar General were both experiencing slumping profits, and declining margins. But Family Dollar was considered in better shape than Dollar General, with stronger same-store sales growth.
Industry observers at the time were on the lookout for possible deals in the sector, said Brian Yarbrough, an analyst with Edward Jones.
“At some point this industry was going to shrink,” Yarbrough said. “There was a lot of thinking that there is an opportunity here.”
With this in mind, investment bankers at Wachovia, the Charlotte bank now part of Wells Fargo, arranged a meeting between Levine and Michael Calbert, who led KKR’s investments in the retail industry until retiring in 2014, according to the source familiar with the situation.
At Aquavina, the pair discussed KKR’s interest in Dollar General and the possibility of a combination with Family Dollar, the documents indicate.
It’s not clear whether any further talks were held, or what a possible deal would have meant to Family Dollar’s brand, headquarters and employment. A deal with both Family Dollar and Dollar General, however, would have been much more complex than just taking Dollar General private.
Family Dollar, Dollar General, KKR, Calbert and Wells Fargo either declined to comment or did not respond.
Although no deal emerged for Family Dollar, Wachovia agreed to underwrite a portion of the debt KKR needed to finance its Dollar General purchase.
According to an internal bank memo in spring 2007, Wachovia felt it should have a “meaningful role” in selling the debt because it was a large player in the consumer and retail sector and because it introduced KKR to executives in the industry, including at Family Dollar.
“KKR has made it clear that these were value-added discussions and aided in their analysis and ultimate decision to buy Dollar General,” the memo says. “KKR has also said they would like to use Dollar General as a platform to acquire other similar concepts, including Family Dollar.”
KKR’s purchase of Dollar General closed in July 2007 but the deal had its rough spots. Global credit markets began melting down soon after the close, forcing Wachovia and other banks to buy $725 million in bonds issued to finance the deal because they couldn’t readily sell them to investors, according to a Bloomberg News story at the time.
Dollar General’s path
Going private, however, ultimately paid off for Dollar General.
KKR brought in new management that was credited with turning the company around. The retailer opened new stores, remodeled other locations, introduced more private brand offerings and took other steps to improve operations.
In 2009, Dollar General held an initial public offering that priced the company’s stock at $21 per share. By the time KKR sold its last batch of shares in 2013, the stock was trading around $60.
Following Dollar General’s IPO, Family Dollar’s shares lagged those of its rival. The Matthews-based company – founded in Charlotte in 1959 by Howard Levine’s father, Leon – became a takeover target.
Starting in 2011, Family Dollar experienced seemingly nonstop drama over its future. Well-known activist investors Nelson Peltz and Carl Icahn pressed the company to do deals, with Icahn last year publicly saying Family Dollar needed a new CEO.
In July 2014, Family Dollar agreed to an $8.5 billion sale to Dollar Tree. Shareholders approved the deal in January after the company successfully fended off a hostile bid by Dollar General.
Looking back, 2007 would prove a crossroads moment for both Family Dollar and Dollar General.
For Family Dollar, it’s not certain that a buyout deal with KKR and Dollar General would have been a better option for the company’s shareholders or employees. But seven years later, the company would find itself up for sale.
For Dollar General, the retailer missed a possible opportunity to merge with Family Dollar, but emerged as the stronger company.
“Since Dollar General went private and came back public, Dollar General has been lights out,” Yarbrough, the Edward Jones analyst, said. “Family Dollar has had a lot of hiccups, a lot of problems.”
Rothacker: 704-358-5170; Twitter: @rickrothacker
What’s next for Dollar Tree deal?
Chesapeake, Va.-based Dollar Tree has said it expects its $8.5 billion purchase of Family Dollar Stores to close this month, capping a 10-month takeover drama.
After Family Dollar shareholders approved the deal in January, the biggest remaining hurdle became regulatory approval from the Federal Trade Commission. Experts say the company will need the sale of stores for competitive purposes to be determined before it gets the final nod.
Dollar Tree could provide an update on the deal Thursday when it reports first-quarter earnings. Rick Rothacker