MATTHEWS, N.C. — Family Dollar Stores Inc. has rejected an enhanced acquisition bid by Dollar General Corp. made earlier this week.
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Family Dollar said Friday that it turned down Dollar General’s $80-per-share acquisition proposal on Sept. 2, valued at $9.1 billion, for the same reason it nixed the first offer: antitrust concerns.
At the same time, Family Dollar reaffirmed its aim to proceed with the cash-and-stock deal it struck in late July with Dollar Tree Inc. Under that agreement, Dollar Tree would acquire Family Dollar for $8.5 billion, or $74.50 per share.
Dollar General announced its initial bid to acquire Family Dollar on Aug. 18, offering to pay Family Dollar shareholders $78.50 per share, for a total deal value of $8.95 billion. Citing anticompetitive concerns, Family Dollar rejected Dollar General’s offer a few days later. In making its second proposal, Dollar General also indicated that it would consider making a hostile bid for Family Dollar.
"Our board of directors, with the assistance of outside advisors and consultants, reviewed all aspects of Dollar General’s revised proposal and unanimously concluded that it is not reasonably likely to be completed on the terms proposed," Family Dollar chairman and chief executive officer Howard Levine said in a statement on Friday. "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. Accordingly, our board has rejected Dollar General’s revised proposal and reaffirmed its support of the transaction with Dollar Tree, which delivers attractive value in the form of immediate upfront cash and upside participation in a combined Dollar Tree-Family Dollar entity, as well as closing certainty."
Also on Friday, Dollar Tree and Family Dollar said they have amended their merger agreement to include a commitment by Dollar Tree to divest as many stores as necessary or advisable to obtain antitrust clearance for the transaction. The two companies also announced that they expect the deal to close sooner, as early as the end of November.
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"Dollar Tree is committed to working hard to complete our acquisition of Family Dollar as quickly as possible. Our amended agreement is clearly superior to Dollar General’s revised proposal based on antitrust risk, deal certainty and time value of money," stated Dollar Tree CEO Bob Sasser. "Unlike Dollar General, we expect to be required to divest few, if any, stores because our business model is significantly different from Family Dollar’s model. Our product assortment and pricing is not driven by local competition, and we have very limited store overlap. As evidence of our confidence in and commitment to closing this transaction without delay, we are amending our merger agreement to provide for a commitment to divest as many stores as necessary to obtain antitrust clearance."
Dollar Tree and Family Dollar reported Friday that they expect the Federal Trade Commission to issue a second request for additional information on Sept. 8. The companies said that they had anticipated the move from the FTC.
"Dollar Tree and Family Dollar continue to have productive discussions with the FTC," Sasser noted, "and despite the anticipated second request from the FTC we remain confident in our ability to complete our transaction with Family Dollar by as early as the end of November 2014."
Drug chains are watching the contest for Family Dollar closely. The rapid expansion of the deep discount retail segment in recent years has resulted in heightened competition for chain drug retailers in the front end of their stores, where they already face off with mass merchants, supermarkets and other retail formats. Any deal for Family Dollar would create a larger competitor that could sharpen price competition even more in the front end.
In rejecting Dollar General’s latest offer, Family Dollar stressed that the FTC would scrutinize the impact of such a deal more closely than Dollar General anticipates. As part of its revised acquisition proposal, Dollar General said it would be willing to divest up to 1,500 stores — more than twice as many as in its earlier proposal — if required to do so by the FTC. Dollar General also agreed to pay a $500 million reverse break-up fee to Family Dollar if the transaction falls through due to antitrust reasons.
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Family Dollar pointed to pricing as another obstacle in a potential merger with Dollar General. Family Dollar said the pricing for thousands of its stores is based on the presence of local Dollar General outlets and, as a result, the FTC likely would see a combination of the two dollar store chains as hoisting prices. Meanwhile, Dollar Tree has a different pricing model, offering everything at $1 or less, whereas both Dollar General and Family Dollar sell similar, everyday products at prices of $10 or less.
In addition, Family Dollar noted that a merger with Dollar General would create a much bigger company. The combination of the two retailers would create a chain with nearly 20,000 stores and annual sales of over $28 billion. A merger of Family Dollar and Dollar Tree would create a retailer with over 13,000 stores in 48 states and five Canadian provincessales and annual sales topping $18 billion.
"A Dollar General merger with Family Dollar would involve nearly 20,000 stores, and the sheer number of local retail overlaps would be among the greatest the FTC has ever reviewed," Family Dollar stated on Friday. "Dollar General and Family Dollar compete in thousands of local geographies, with more than 6,000 Family Dollar stores competing with a Dollar General store within three miles. Many of these stores — far more than 1,500 — do not have a Walmart within the same distance. The FTC’s detailed review of so many local geographic areas would likely result in a prolonged review process. Further, the FTC will likely give this proposed transaction particularly close scrutiny because both Dollar General and Family Dollar focus on selling basic needs at low prices to lower-income customers.
"Finally, before approval, the FTC would likely require that Dollar General find a divestiture buyer and negotiate and execute an acceptable divestiture agreement," Family Dollar added. "The divestiture buyer would need to be an entity that would be able to maintain the pre-merger competitive impact of these stores. All told, the FTC’s review of a Dollar General acquisition could take close to a year or longer if the transaction ends up in litigation."
