Dollar General launches hostile bid for Family Dollar

The fight for Family Dollar entered a new phase Wednesday, as Dollar General launched a $9.1 billion hostile bid to acquire the Matthews-based retailer that could circumvent its board of directors and help Dollar General win antitrust approval for the deal.

Dollar General took its $80-a-share, all-cash tender offer directly to Family Dollar’s shareholders. The move goes around Family Dollar’s board, which has twice rejected Tennessee-based Dollar General.

Instead, Family Dollar’s board wants the company to be acquired by smaller rival Dollar Tree, and has already accepted a $74.50 cash-and-stock offer from that company. Though that bid is worth about $640 million less than Dollar General’s, Family Dollar’s board insists Dollar Tree can win antitrust approval from federal regulators, while Dollar General cannot.

As shareholders weigh the competing offers, analysts said the outcome would likely hinge on what regulators at the the Federal Trade Commission say.

Brian Yarbrough, an analyst with Edward Jones in St. Louis, said shareholders would have to weigh the risk of a protracted fight with regulators versus a lower bid from Dollar Tree.

“Do the shareholders see it through Family Dollar’s eyes, or do they see it Dollar General’s way?” asked Yarbrough.

Analysts at the Standard & Poor’s credit rating agency said the hostile bid “furthers the uncertainty” around Family Dollar, and warned of a potentially drawn-out regulatory review and shareholder fight.

Dollar Tree has pledged to divest as many stores as necessary to win antitrust approval for the deal – a “hell-or-high-water” provision – while Dollar General has said it would divest up to 1,500 stores.

But by making a tender offer, Dollar General CEO Rick Dreiling said his company will be able to start antitrust discussions with the FTC right away. That could give the company more leverage if regulators indicate they’re willing to approve the deal.

Family Dollar said in a statement that its board of directors will evaluate the tender offer and give shareholders its recommendation by Sept. 23. Until then, the company urged its shareholders not to take any action. The tender offer is set to expire Oct. 8, but it could be extended.

Analysts have said a Dollar General acquisition is likely to lead to much deeper cuts in Matthews, where Family Dollar employs about 1,400 workers at its headquarters. Dollar General and Family Dollar have much more similar, and thus redundant, business models than Dollar Tree, which sells everything for $1.

If Family Dollar is acquired by Dollar Tree, the companies have said they would keep the Family Dollar brand, chief executive Howard Levine would work for the combined company and many of the corporate jobs would stay in Matthews. Dollar General has accused Family Dollar’s board of rejecting their more lucrative offer because of such assurances.

When Dollar General and Family Dollar first held early talks about a combination last year, Levine wanted a prominent role for himself and Charlotte, according to securities filings by Dollar General Wednesday.

“Mr. Levine expressed his interest in serving as the chief executive officer of the combined company and establishing its headquarters in Charlotte, North Carolina,” Dollar General wrote in a narrative of the deal. “(A Dollar General representative) noted that these specific requests likely would be viewed unfavorably by Dollar General’s board.”

Family Dollar and Levine have said such factors didn’t play a role in their decision to reject Dollar General.

Dollar Tree and Family Dollar have said they plan to close their deal in less than three months, by the end of November. In addition to regulatory approval, the acquisition also needs Family Dollar shareholder approval. A date for a shareholder vote has not been set. If Dollar General is able to persuade enough shareholders to oppose Family Dollar’s planned Dollar Tree deal, the company could have a shot at its own $80-a-share offer winning the day.

Antitrust vs. higher offer

On Wednesday, Dollar General’s chief executive said his company’s offer is a better deal for shareholders.

“Our offer provides Family Dollar shareholders with significantly greater value than the existing agreement with Dollar Tree, as well as immediate and certain liquidity for their shares,” Dreiling said in a statement. “By taking this step, we are providing all Family Dollar shareholders a voice in this process, and we urge them to tender into our offer.”

A combination of Dollar General and Family Dollar would create the largest small-box discount retail company in the U.S., with almost 20,000 stores. That would be far larger than Dollar Tree, which operates about 5,100 stores. On the other hand, a Dollar Tree-Family Dollar combination would also create the largest such company in the U.S., with 13,000 stores. That would only be slightly larger than Dollar General, however.

Yarbrough said he doesn’t expect Dollar Tree to come back with a higher bid.

“Dollar General can take this much higher than they currently are,” he said, possibly as high as $90 a share. Dollar Tree, which is about half the size of Dollar General, wouldn’t be able to match that. “If they raise their bid, Dollar General’s going to come back and immediately raise their bid more.”

Instead, he said the FTC’s approval or disapproval of Dollar General’s bid could be decisive.

“If they come back and say, ‘You need to close 3,000 locations,’ then Dollar General needs to go back and reconsider,” Yarbrough said.

One possible complication is that Dollar General would have to find a buyer for all the stores the FTC says it must sell. The store can’t just shut them down, because that would reduce competition. That could make a large divestiture expensive and complicated.

“Why would shareholders vote for a deal at $80 that could fall through, instead of taking the deal at $74.50?” said Yarbrough.

On the other hand, if the FTC says it would approve Dollar General’s bid, Yarbrough said it would be tough for Family Dollar to tell shareholders to stick with the lower Dollar Tree offer.

Going directly to shareholders is the same strategy two Brazilian firms are using in their bid to acquire Charlotte-based Chiquita Brands International for $611 million. They’re attempting to preempt the company’s planned merger with Dublin-based fruit company Fyffes. After the Brazilian firms took their offer to Chiquita’s shareholders, the banana company was forced to delay its planned shareholder vote and open talks with Cutrale and Safra.

Dollar General’s hostile bid continues a wild week of merger and acquisition news for Charlotte-area companies. After weeks of resistance, Chiquita agreed to talk to its Brazilian suitors on Monday. The same day, Electrolux, which has its North American headquarters in Charlotte, announced it had reached a deal to buy General Electric’s appliance business for $3.3 billion.

Family Dollar’s stock closed up less than 1 percent at $78.86 a share Wednesday.

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