Family Dollar: Levine was prepared to accept HQ move

Family Dollar CEO Howard Levine was willing to accept the company’s headquarters moving to Tennessee last year in order to secure an acquisition by rival Dollar General, the company said in securities filings Wednesday.

Now, the Matthews-based company is fighting a $9.1 billion hostile bid from Dollar General. Family Dollar’s board on Wednesday asked shareholders not to sell the Tennessee company their stock, following Dollar General’s tender offer made directly to shareholders last week.

This is the third time in a month that Family Dollar’s board has rejected Dollar General’s advances. Rather than be bought by Dollar General, Family Dollar’s board wants the company to be acquired by Dollar Tree, a deal it agreed to in July.

The outcome of the fight over Family Dollar could have far-reaching implications for the Charlotte region. Founded by Leon Levine in Charlotte in 1959, the company now employs 1,400 workers at its Matthews headquarters.

Dollar General has accused the company of favoring Dollar Tree’s offer because it would provide Howard Levine, son of the founder, a seat on the combined company’s board of directors and a job for at least two years. The companies have also said they would keep many of Family Dollar’s headquarters jobs in place, and keep the Family Dollar name.

Analysts have said an acquisition by Dollar General would likely lead to much steeper cuts in Matthews, because the companies have such similar business models.

In telling shareholders not to tender their shares to Dollar General, Levine called the $80-per-share, all-cash offer “illusory,” and said it would not be approved by the Federal Trade Commission.

“The offer cannot close on the terms proposed,” said Levine, 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.”

A Family Dollar spokeswoman said the company wouldn’t make Levine or other executives available for an interview.

Differing accounts

Throughout the takeover battle – which heated up in August with Dollar General’s first unsolicited bid – the companies have offered their own versions of events leading up to the offer. Wednesday, Family Dollar gave its most detailed description yet of the company’s acquisition talks in a 28-page narrative.

The rival companies’ accounts differ sharply in tone. In Family Dollar’s account, Levine is consistently interested in pursuing a deal with Dollar General, while that company dithers. In Dollar General’s take, Family Dollar and Levine drag their feet and hide their talks with Dollar Tree.

Both sides agree that Dollar General first approached Family Dollar in early 2013. In October, Levine and Dollar General CEO Rick Dreiling met in person to discuss a deal.

For the first time, Family Dollar said Wednesday that Levine agreed at that meeting that if Dollar General bought Family Dollar, the headquarters would be in Tennessee and Dollar General’s management would run the company. Levine told Dreiling he “would have no problem with such an approach,” according to securities filings.

The new detail seems designed to counter assertions by Dollar General that Family Dollar unfairly favored Dollar Tree because Levine would keep a job and the Matthews headquarters would remain. Dollar General’s account of the meeting, published in its own securities filings, doesn’t mention Levine’s concessions.

The CEOs met again on June 19. According to Family Dollar, Levine hinted – but didn’t explicitly say – Dollar Tree was a possible acquirer.

“Dreiling did not think that it would be economically possible for Dollar Tree to acquire Family Dollar,” the Matthews retailer wrote. Levine, who was already secretly deep into discussions with Dollar Tree, asked Dollar General to make an offer.

“The representatives of Dollar General conveyed that Dollar General was not interested in a strategic transaction with Family Dollar,” the company wrote. “Dreiling ... indicated that Dollar General had been pressured by its own stockholders to pursue a transaction with Family Dollar.”

To ward off such pressure, Dollar General was considering putting out a statement unequivocally saying it wasn’t interested in Family Dollar, according to Wednesday’s securities filings.

In Dollar General’s version of the meeting, “Representatives of Dollar General consistently expressed an interest in exploring a combination,” and said they would likely offer a “modest premium” to the stock price.

The companies don’t even agree on who was supposed to call whom afterward: Dollar General says Levine told them he would get back to them, while Family Dollar says that Dollar General was supposed to call them.

Five weeks later, Dollar Tree and Family Dollar announced their deal.

Antitrust concerns

While Dollar Tree has offered less money – $74.50 a share in cash and stock, for a total of $8.5 billion – Family Dollar’s board has said the company’s offer is more likely to be approved by federal regulators. Family Dollar laid out its most detailed case Wednesday for why its board thinks antitrust regulators would reject a combination with Dollar General, based on its ongoing antitrust review with the FTC.

Dollar General has promised to divest up to 1,500 of the combined company’s 20,000 stores to win approval for a Family Dollar acquisition. Dollar Tree, which is smaller than either of its two rivals, has said it will sell as many stores as regulators require in order to close the deal with Family Dollar.

More than 6,000 of Family Dollar’s 8,200 stores are within a 3-mile radius of a Dollar General store, the company said, and the two companies have “nearly identical store formats and product mixes.” At more than 1,500 of those stores, there is no nearby Walmart, and pricing is based “solely on the presence of local Dollar General stores,” Family Dollar said.

The Dollar Tree-Family Dollar deal still requires shareholder approval, though a date for a shareholder vote hasn’t been set. Dollar General’s rival tender offer to buy the company runs through Oct. 8.

In a statement, Dreiling said Wednesday that his company is still interested in buying Family Dollar. He also expressed frustration.

“Dollar General has made every good faith effort to engage in constructive discussions,” Dreiling said. “At each turn, despite Dollar General’s superior proposals and to the detriment of the Family Dollar shareholders, the Family Dollar board has refused to engage.”

“The FTC is likely to take the position that Family Dollar’s pricing model would immediately lead to higher prices in thousands of locations if Dollar General was no longer an independent competitor,” Family Dollar said. The company also raised the specter of the antitrust review with Dollar General dragging on for a year, leaving shareholders in limbo.

If Dollar General’s offer were rejected due to antitrust concerns, the company has offered to pay Family Dollar shareholders a $500 million fee. But Family Dollar said that would only amount to $3 a share, after taxes. The company said it and Dollar Tree are already “deeply involved” in the antitrust review for their proposed deal, which could close by the end of the year.

“The Dollar Tree merger has a very high likelihood of receiving (antitrust) clearance,” Family Dollar told its shareholders.

So far, Family Dollar’s two largest shareholders – Levine and activist fund Trian Fund Management – have committed to vote for the Dollar Tree deal. They own about 16 percent of shares outstanding. Investor John Paulson’s hedge fund is the third-largest owner, with 7 percent of shares. That company hasn’t said how it will vote.

In a message to Family Dollar employees Wednesday, Levine sought to allay their concerns.

“I appreciate and understand that all of the news that has been surrounding our company lately may be distracting and has created some uncertainty,” Levine said in a message to employees. “Once again, the most important thing each of us can do is remain focused on performing our day-to-day responsibilities and serving our customers.”

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