Dollar General on Tuesday dialed up the pressure on Family Dollar, sweetening its all-cash offer and adding safeguards aimed at soothing Family Dollar’s antitrust concerns.
The fattened $9.1 billion offer could make it harder for Family Dollar’s board to say no to a deal that analysts say could result in the dismantling of the Matthews headquarters, where the retailer employs some 1,400 corporate workers.
Dollar General said if Family Dollar’s board doesn’t enter into discussions, it will take its offer directly to Family Dollar’s shareholders.
Family Dollar, founded in Charlotte in 1959, announced in July it had reached agreement on a $74.50 per-share cash-and-stock deal with Virginia-based Dollar Tree. But larger rival Dollar General last month offered to buy Family Dollar in a $78.50 per-share all-cash deal – $4 a share, or 5.4 percent, higher than the Dollar Tree offer.
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Family Dollar rejected Tennessee-based Dollar General’s offer four days after the unsolicited bid emerged. Family Dollar chief executive Howard Levine cited antitrust issues, noting that the combined company would have many overlapping locations and would be more than three times bigger than Dollar Tree, its next-largest rival.
In Tuesday’s offer, Dollar General said it would pay $80 per share, noting that bid represents a 31.9 percent premium over Family Dollar’s closing stock price on the day before the Dollar Tree deal was announced.
Family Dollar shares climbed less than 1 percent Tuesday, closing at $80.22.
Dollar General also said it would be willing to divest itself of as many as 1,500 stores rather than the 700 it initially said it would shed to avoid problems with federal antitrust regulators.
Dollar General said it was so confident in its deal that it offered to pay a $500 million reverse breakup fee to Family Dollar should antitrust regulators block it.
In a letter to Family Dollar’s board Tuesday, Dollar General CEO Rick Dreiling said his company had been “extremely disappointed” that its first bid had been rejected without discussions between the two companies.
He urged the Family Dollar board to come to the negotiating table.
“Only by engaging with us can you ensure that you have fulfilled your duty to your shareholders to be well-informed and that you have acted in the best interests of your shareholders to maximize the value of their shares,” he wrote.
Family Dollar said in a prepared statement that it had received the latest offer and would review it. The statement added: “The company’s board of directors has not changed its recommendation in support of the merger with Dollar Tree.”
Levine sent a memo to Family Dollar employees saying he had little information he could share with them at the moment. He pledged to keep them posted.
“While we understand that these developments can be distracting,” he wrote, “our customers and teams continue to rely on us.”
A spokesman for Dollar Tree said the company had no comment.
The latest Dollar General offer “more than adequately” addresses the antitrust concerns, BB&T Capital Markets analyst Anthony Chukumba and associate Dan Cannata wrote in a research note Tuesday.
“We think Family Dollar’s board will be hard pressed to justify rejecting Dollar General’s revised offer without risking backlash from its shareholders,” they wrote. “We would not be surprised to see Dollar Tree simply walk away if Family Dollar agrees to the Dollar General offer.”
They said they see Family Dollar as a “must have” for Dollar General because Dollar General’s multiyear turnaround plan has “largely petered out” and a combined Dollar Tree-Family Dollar would provide stiff competition.
Dollar Tree and Family Dollar use different retail strategies – everything at Dollar Tree sells for $1, while Family Dollar has many price points. Dollar General, on the other hand, has a business model virtually identical to Family Dollar. Analysts have said that means more duplicate functions could be cut in a merger, likely at the Matthews headquarters.
The proposed Dollar Tree deal, announced July 28, envisions Dollar Tree and Family Dollar keeping many of the corporate jobs in Matthews. Levine would stay on at the combined company for at least two years, reporting to Dollar Tree CEO Bob Sasser. Dollar Tree also plans to keep the Family Dollar name on many of the combined company’s stores.
Dollar General hasn’t said what it might do with the Matthews headquarters jobs or the Family Dollar name, or what Levine’s role would be.
Brian Yarbrough, an analyst with Edward Jones, said Family Dollar’s board seems to have little choice but to accept Dollar General’s offer. He said that could mean the end of the Family Dollar brand and substantial cuts at the Matthews headquarters by the end of next year.
“It will be unfortunate, but you’ll probably see more job losses,” he said. “I think that headquarters will be basically empty.”
Dollar General’s proposal would create the nation’s largest discount variety retailer. Dollar General is No. 1 in the sector, trailed by Family Dollar. The combined company would have $28 billion in revenue, more than 160,000 employees and almost 20,000 stores.
Dollar General said it began studying the antitrust issues more than a year ago but also hired Richard Feinstein, former director of the Federal Trade Commission’s antitrust enforcement bureau, to review the company’s analysis.
Dollar General said Feinstein agreed with the company’s belief that the original terms of its bid would have withstood scrutiny.
Dreiling suggested in his letter to Family Dollar that a federal antitrust analysis would focus not on his firm’s competition with Family Dollar, but instead would center on Wal-Mart, the main driver of Dollar General’s strategic and pricing decisions.
BMO Capital Markets analyst Wayne Hood said in a note to clients that Dollar General could further boost its offer as high as $90 per share, “potentially delivering a knock-out punch to a Dollar Tree bid.”