Dollar General said to explore Family Dollar bid

Dollar General is weighing a bid for Family Dollar Stores that would challenge Dollar Tree’s $8.5 billion takeover of the discount retailer, people with knowledge of the matter said.

Dollar General is working with an adviser to evaluate its options and knows that banks are willing to finance a counterbid, one of the people said, asking not to be identified discussing private information. Matthews-based Family Dollar last week agreed to be acquired by Dollar Tree. Investors Carl Icahn and Nelson Peltz had pushed for a sale.

While Dollar General had earlier passed on the chance to bid for Family Dollar, the company is re-evaluating its options out of concern that the smaller retailer may soon be out of its reach for good, two people said. There is no guarantee that it will make an offer, the people said, with one putting the odds of a bid at 50 percent.

Dollar General hasn’t approached Family Dollar about its interest yet, one person said. Dollar General and Family Dollar both declined comment.

Family Dollar has traded at or above the $74.50 per share price that Dollar Tree has agreed to pay since that cash and stock agreement was announced on July 28, indicating that investors expect a higher offer. The company has a market value of about $8.9 billion. The shares closed Tuesday at $77.25, up 2 percent.

Leon Levine founded Family Dollar in Charlotte in 1959. The chain has grown to 8,200 stores around the country, but it has struggled to match larger rival Dollar General in recent years.

Despite weeks of pressure from activist investor Icahn for a sale, Family Dollar chief executive Howard Levine, Leon Levine’s son, told the Observer last week that plans to sell the retailer started months earlier. Dollar Tree first approached Family Dollar in March, he said.

Levine said the deal is the best option for Family Dollar shareholders – of which he is the largest, with more than 8 percent of the stock – because it nets them $59.60 a share in cash and $14.90 a share in Dollar Tree stock. That adds up to a 22.8 percent premium over the stock’s closing price before the deal was announced.

Levine said he expects the company to have a strong presence at its Matthews offices even after Dollar Tree completes its acquisition. He acknowledged some corporate jobs could be combined, but he said it’s too soon to know exactly how any changes would play out.

The combination of Family Dollar and Dollar Tree – the No. 2 and No. 3 dollar store chains – would leapfrog Goodlettsville, Tenn.-based Dollar General in number of stores to become the largest. With more similarities to Family Dollar, Dollar General may be able to extract even greater benefits from a takeover than Dollar Tree through cost cuts, according to Poonam Goyal, a senior retail analyst for Bloomberg Intelligence.

While Dollar Tree caters to middle-class consumers and sells most items for $1, the other chains both focus on low-income shoppers and offer more food at various price points.

“Dollar General and Family Dollar is a match, they are comparable businesses coming together,” Goyal said. “While Family Dollar and Dollar Tree are dollar stores, they are very different dollar stores.”

One factor that has held Dollar General back is the planned retirement of Chief Executive Officer Rick Dreiling. If Dollar General successfully outbid Dollar Tree, he would likely need to stay past his expected May 2015 retirement date to help integrate the two companies, two people said.

Sales at the store chains, which specialize in cheap household goods, have slowed since the U.S. economy began improving and consumers became less focused on finding bargains. The chains are still outpacing bigger discount retailers such as Wal-Mart Stores and Target.

If combined, Dollar General and Family Dollar would have about $28 billion in annual revenue, according to data compiled by Bloomberg. Staff writers Ely Portillo and Rick Rothacker contributed.