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Dollar General Moves to Buy Family Dollar

A bidding war is breaking out to buy midmarket discount retailer Family Dollar. The winner will have a strong position against Walmart.

Contrary to its rock bottom retail prices, Dollar General is boosting its bid to acquire the Family Dollar Store chain, in an attempt to stake its claim as market leader among discounters.

Dollar General is now offering $9.1 billion or $80 per share in cash to buy midmarket retailer Family Dollar. That’s in addition to agreeing to sell up to 1,500 locations (over twice what it said originally) if the FTC demands it, as well as offering to pay a $500 million reverse termination fee if antitrust regulators halt the deal.

The stepped up deal comes in response to concerns among Family Dollar’s board members that the deal would violate antitrust laws put in place a century ago. In 1914, Congress passed two laws to supplement the Sherman Act, which was put in place in 1890. The purpose of all three is to ensure a competitive marketplace that would benefit consumers while combating such harmful practices as price fixing, among others.

“We are confident that our enhanced proposal sufficiently addresses any concerns that led Family Dollar’s Board of Directors to reject our prior proposal without any discussions between our companies,” Dollar General’s chairman and CEO Rick Dreiling said in a statement. “Even as a secondary antitrust review supported our previous proposal, we revised our offer to demonstrate the seriousness of our commitment. Our revised proposal provides Family Dollar shareholders with significantly increased value over the existing agreement with Dollar Tree, as well as immediate and certain liquidity for their shares.”

Family Dollar board member Trian Management, an activist hedge fund, and the company’s CEO Howard Levine (the son of the founder) represent about 16 percent of the shares, and were originally leaning toward being acquired by another discount player in the space, Dollar Tree. That deal was set at $8.5 billion and announced at the end of July, and would have made Dollar Tree’s footprint quite a bit larger. The company would have grown to 13,000 locations in the lower 48 and Canada and its revenue to an estimated $18 billion.

What both Dollar General or Dollar Tree stand to gain is a stronger foothold in a market currently dominated by Walmart. For Dollar Tree, which sells household and party supplies for a buck or less, the acquisition of Family Dollar represents a widening of its inventory to a variety of price points (while still remaining a bargain) along with access to more stores that cater to low income shoppers. Walmart (and Target, too) are making a big play in this space by opening smaller format stores. Walmart is slated to open some 300 more diminutive locations to add to a fleet that is already proving to have better sales than its supercenters. Comparative sales at Walmart’s Neighborhood Market stores open for a year grew approximately 4 percent for fiscal year 2014.

And the market for low-income shoppers itself is projected to grow. According to market research firm Euromonitor International, the 46.5 million Americans living below the poverty line made the annual U.S. market for deep discount stores increase by 45.7 percent to $48.2 billion between 2008 and 2013. That number is expected to continue to rise to $57 billion in four years.

While catering to a growing contingent is certainly an attractive prospect, either company’s acquisition of Family Dollar would also mean that whichever two chains join forces have the power to negotiate bigger discounts from suppliers, while still keeping their own costs down. As for the antitrust concerns, Dollar General appeared confident that its documentation would illustrate that the items filling the shelves are the same that could be found in most other grocery and mass market retailers.

Dollar General CEO Dreiling underscored the company’s assurance that its deal is most promising (and profitable) in a statement: “If the Family Dollar Board fails to seize this opportunity to maximize value for its shareholders, we will consider taking our superior proposal directly to the Family Dollar shareholders.”

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