Dollar General (DG) is showing itself to be a particularly motivated buyer it is in its pursuit of rival discount retailer Family Dollar Stores (FDO). The bidding war entered a new phase Wednesday as Dollar General began a tender offer to shareholders on its $9.1 billion cash bid. More importantly, the “hostile” approach allows Dollar General to begin discussions with regulators about antitrust concerns.
Family Dollar has repeatedly cited antitrust problems as its main reason for favoring a $74.50 cash-and-stock offer from Dollar Tree (DLTR), which came in late July and caught Dollar General executives by surprise. Dollar General is offering $80 per share and says it would divest as many as 1,500 stores and pay Family Dollar a $500 million “reverse break-up fee” if the sale is rejected by the Federal Trade Commission. “By taking this step, we are providing all Family Dollar shareholders a voice in this process, and we urge them to tender into our offer,” Dollar General’s chairman and chief executive, Rick Dreiling, said in a statement.
The tender offer increases the pressure on Family Dollar directors to engage with the higher bid and could force Dollar Tree to sweeten its offer closer to what its rival would pay. In response, Family Dollar said it would review the tender offer and asked its shareholders to take no action on the proposal. Dollar General has suggested that Family Dollar—where CEO Howard Levine is the largest shareholder—prefers the Dollar Tree bid because that company would allow him to continue running the chain after its sale.
By throwing its offer directly to Family Dollar shareholders, Dollar General is effectively asking them to consider whether U.S. regulators would nix the combination. Of course, they also want to highlight the higher price. One big reason that antitrust clearance may not be as colossal as Family Dollar believes: Wal-Mart (WMT), which is moving to smaller stores as a way to lure more shoppers when they want toilet paper, laundry detergent and dog food, quickly.
Regulators may conclude that Wal-Mart—not Dollar General—is the market’s true pricing arbiter for lower-income shoppers, Wole Research analyst Scott Mushkin wrote today in a note to clients. The retail giant is “by far the most important factor in most areas as it is not only the price setter but is also the dominant share leader, frequently with share above 70 percent.” Further, Mushkin argues that Family Dollar’s prices are “largely irrelevant” in its markets and that has caused sales to suffer.
The “Dollar” moniker for all three retail chains is somewhat misleading in the case of Family Dollar and Dollar General. Both sell a variety of national branded goods—most of them priced well over $1—and target shoppers with low incomes. That overlap is one aspect of Family Dollar directors’ concerns about government approval of Dollar General’s offer. Dollar Tree, meanwhile, caters to more middle-class shoppers and has most products priced at $1.
