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Bidding War Starts for Family Dollar

Dollar General Unexpectedly Counters Dollar Tree's Bid for 2nd Largest Small-Box Discount Retailer
August 18, 2014
Richard W. Dreiling, chairman and CEO of Dollar General, is looking to go out with a bang. Before he retires from the firm next May, Dreiling has now made it his goal to acquire his largest rival.

With more than 11,500 stores in 40 states, Dollar General has more retail locations than any retailer in America. This morning, the company launched a bidding war for Family Dollar Stores Inc., operator of nearly 8,200 stores. Dollar offered $9.7 billion for the chain.

The third-largest operator, Dollar Tree Inc., with 5,080 stores, already has an approved merger agreement with Family Dollar to acquire it for about $8.5 billion in a cash and stock.

The proposal was conveyed this morning in a letter to Family Dollar’s board of directors.

Such a combination would solidify Dollar General’s position as the largest small-box discount retailer in the U.S. with nearly 20,000 stores in 46 states and sales of over $28 billion.

Dollar General’s all-cash proposal of $78.50 per share would provide Family Dollar shareholders with a substantially superior valuation to the $74.50 per share cash / stock offer announced by Dollar Tree on July 28.

“For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares,” Dreiling said. “For both Dollar General and Family Dollar customers, we would be able to provide better value and greater selection.”

Analysts have long viewed a merger between Dollar General and Family Dollar as unlikely even after Dollar Tree’s offer. Dollar General has twice called off discussions with Family Dollar in the past 12 months, according to Family Dollar.

What’s changed?

“First, the [Dollar Tree] deal told us that Family Dollar was a willing seller - a development not known previously,” Charles Grom, an analyst with Sterne Agee, said this morning. “Second, we believe the fear of a better operated Family Dollar (via Dollar Tree) was enough to get Dollar General off the sidelines and counter with a bid. While it remains to be seen if Dollar Tree will counter with a higher proposal, we think the Family Dollar assets ultimately end up in the arms of Rick Dreiling and the team from Goodlettsville, [TN, Dollar General’s headquarters town].”

Goldman Sachs and Citigroup Global Markets Inc. have agreed to provide committed financing for all of Dollar General’s financing necessary to consummate the transaction. The financing includes estimated fees and expenses, including the $305 million termination fee payable to Dollar Tree in the event Family Dollar terminates the existing merger agreement to enter into a merger agreement with Dollar General.

Dollar General has undertaken significant economic and antitrust analysis with respect to the transaction and is confident it can quickly and effectively address any potential antitrust issues, the company said.

Dollar General added that it is prepared to commit to divest up to 700 retail stores in order to achieve the requisite approvals, which is approximately the same percentage of the total combined stores represented by the 500 U.S. store divestiture commitment in the Dollar Tree merger agreement.

After announcing declining sales and lower profits for the second quarter, Family Dollar had already announced that it planned to close 370 of its 8,200 stores and slow the pace of new store growth.

Family Dollar and Dollar Tree have yet to make any official announcement regarding Dollar General’s offer. Stay tuned.

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