Coverage: Dollar General goes hostile

Another day, another dollar – or many dollars — for investors as the battle of discount retailers continues. Dollar General said it was taking its offer for Family Dollar to shareholders.

The New York Times story by David Gelles had these details about the merger:

The three-way tug of war being hashed out in the discount retail industry just got a little bit more contentious.

On Wednesday, Dollar General said it was going hostile and taking its $9.1 billion offer for Family Dollar directly to shareholders after being rebuffed. The move further complicates Family Dollar’s agreed-upon deal, announced in July, to sell itself to Dollar Tree for $8.5 billion.

Family Dollar shareholders will now have the chance to tender their shares for the $80 apiece being offered by Dollar General, a substantially higher offer than the $74.50 that Dollar Tree has agreed to pay.

But while many shareholders may go ahead and tender their shares, there is no certainty that Dollar General will prevail. Dollar General will not go ahead and buy the shares from investors unless Family Dollar endorses the deal.

Paul Ziobro wrote for The Wall Street Journal that the move could be risky for Dollar General:

Family Dollar said it would review the terms of the tender offer but urged shareholders to take no action at this time. A representative from Dollar Tree declined to comment.

Dollar General’s maneuver is not without its risks—because it is offering to take over the company without having had access to its confidential financial information. Launching the tender offer will, however, allow Dollar General to start antitrust discussions with the Federal Trade Commission, where it can determine how high a hurdle it would have to clear to get a deal through, a person familiar with the matter said.

Dollar General has said it would sell up to 1,500 stores following a merger, although it believes it would have to divest far fewer than that.

Family Dollar has said antitrust concerns are at the heart of its decision to reject Dollar General’s proposed merger. The two chains run very similar businesses—selling a variety of consumable and household products at a range of prices. Dollar Tree, by contrast, sells everything at a dollar.

Bloomberg’s Matt Townsend and Craig Giammona had this background about the ongoing battle:

The contest for Family Dollar began in July, when the company agreed to be acquired by Dollar Tree for $8.5 billion, or $74.50 a share. That deal would merge the market’s No. 2 and No. 3 companies, potentially creating a new leader. Dollar General then stepped in with an unsolicited bid of $78.50 in August, aiming to maintain its perch atop the industry.

After that offer was rejected because of antitrust concerns, Dollar General increased its price to $80 a share in cash. Along with the sweetened bid, it pledged to divest as many as 1,500 locations to placate regulators, up from 700 in its earlier offer. It also said it would pay Family Dollar $500 million if the deal failed to garner approval.

Wal-Mart Stores Inc. (WMT), the largest retail chain in total revenue, has served as a wild card in the saga. It’s pushing deeper into the market for neighborhood discount stores, potentially providing more competition within the industry. To get the deal past the Federal Trade Commission, Dollar General may have to establish that Wal-Mart and other retailers provide enough of a counterweight to a dominant dollar-store chain.

“We now can begin the antitrust review process and will have an opportunity to present our position directly to the FTC,” Dollar General CEO Rick Dreiling said in today’s statement. “As we previously have stated, we are confident in the results of our antitrust analysis, and we look forward to a constructive dialogue with the FTC.”

The CNN Money story by Chris Isidore continued that thought, saying that the combination would still not come close to Wal-Mart’s reach:

Dollar General says it believes its offer would not fun afoul of antitrust regulations. It says that the dominance of Wal-Mart Stores (WMT) in the low-priced retail sector would prevent a combined Dollar General and Family Dollars from raising prices, hurting consumers.

Despite the “dollar” in both their names, many of the items in both stores sell for more than a dollar. Dollar Tree sells everything for $1 or less.

Dollar General also said it is willing to pay all cash for Family Dollar shares rather than the combination of cash and stock being offered by Dollar Tree and is offering a $500 million breakup fee if the bid is not successful.

Discount retailers are struggling to compete with the might of Wal-Mart, making a combination for these smaller retailers crucial. There are still some questions about whether the Federal Trade Commission will allow a deal to go through, but it’s a gamble that Dollar General seems willing to take.