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Source close to Family Dollar thinks Dollar General bid finished

A winner may be in sight in the monthslong Family Dollar takeover fight.

A source close to Family Dollar said Thursday that the company views Dollar General’s hostile bid to buy the retailer as finished – a view echoed by several analysts who have followed the contest – after Dollar General’s announcement Thursday that it needs more time to get antitrust approval.

Family Dollar’s shareholders are set to vote on whether to sell the company to Dollar Tree next week. Sterne Agee analyst Charles Grom wrote in a note to investors that Dollar General’s statement likely ends the “dollar store drama,” with Dollar Tree set to win Family Dollar.

“While it’s plausible that (Family Dollar) holders could pass on the current (Dollar Tree) offer, we think this development is highly unlikely,” Grom wrote.

Even though Dollar General is offering $9.1 billion – $600 million more than Dollar Tree’s offer – Family Dollar CEO Howard Levine has said the Federal Trade Commission is more likely to block Dollar General because of monopoly concerns.

In a statement Thursday, Dollar General said it needs at least until early March to find out whether the FTC will allow or block the deal, and how many stores federal regulators would require Dollar General to sell. That’s more than a month after a special meeting next Thursday where Family Dollar shareholders are scheduled to vote on the Dollar Tree deal.

Dollar General had hoped to have more information from the FTC to sway shareholders before the meeting. The company didn’t respond to a request for comment Thursday.

The source close to Family Dollar said that since Dollar General didn’t take any steps to sway shareholders – such as promising to sell as many stores as the FTC requires or increasing its bid – Dollar General’s push to buy the company is effectively over.

An analyst with UBS wrote that a higher offer from Dollar General isn’t likely, and Dollar Tree will likely win next week’s shareholder vote in Charlotte.

“If (Dollar General) were to come back over the next few days with a higher offer, it could be perceived as not coming from a position of strength. Thus, we think it’s unlikely,” Michael Lasser wrote.

Family Dollar’s stock price sank $1.16 on Thursday, falling to $75.14 a share. That means the stock is trading at almost Dollar Tree’s offer price of $74.50. The stock was well below Dollar General’s $80 per share offer, indicating some shareholders were losing confidence that Dollar General would win.

“It is unclear why (Dollar General) even put this press release out, as it (arguably) damages their case more than it helps,” wrote FBR analyst Dutch Fox. “At this point we think a (Dollar Tree/Family Dollar) combination is a done deal and (Dollar General) is basically through with its (Family Dollar) pursuit.”

Antitrust review

The dilemma facing Family Dollar shareholders is this: If they vote down the Dollar Tree deal, that company will walk away and Family Dollar could owe a $305 million breakup fee. But the Dollar General deal could still fall through, because the FTC hasn’t said it would allow it.

“Shareholders are playing with fire if they vote against the (Dollar Tree) proposal in hopes of getting a few more dollars under Dollar General’s offer,” wrote RBC Capital Markets analyst Scot Ciccarelli.

That uncertainty has led two major shareholder advisory firms to switch their recommendations and tell shareholders they should vote for the Dollar Tree deal. Institutional Shareholder Services and Glass Lewis, which advise shareholders how to vote on major corporate issues, both said Wednesday that Family Dollar shareholders are better off approving the Dollar Tree deal rather than taking a risk and hoping for a higher payout from Dollar General.

Levine has said that the FTC could require Dollar General to sell up to 4,000 stores, while Dollar Tree would have to sell only a few hundred. That could make the Dollar General deal less palatable for shareholders.

Dollar General said Thursday that it still believes the FTC would require it to sell fewer than 1,500 stores but acknowledged the agency’s antitrust review has been tough.

“In its review of the proposed Dollar General/Family Dollar transaction, the FTC has departed from the approach used to analyze retail mergers over recent years and has instead relied heavily on an untested theoretical model for predicting circumstances in which pricing will increase,” wrote Dollar General. The company called the FTC’s technique for analyzing the effects of a merger on prices “controversial.”

Family Dollar is one of the Charlotte region’s most prominent Fortune 500 companies, employing about 1,300 people at its Matthews headquarters on Monroe Road. The company has said that if Virginia-based Dollar Tree buys it, the Family Dollar name will remain on its stores, along with many of the corporate jobs in Matthews.

Dollar General, which is based in Tennessee, hasn’t said what it would do with the Family Dollar name or headquarters.

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