Dollar General (DG 3.36%) wants Family Dollar (FDO +0.00%), and it is willing to play hardball. Dollar General's offer to acquire its retail rival in a deal valued at roughly $9.1 billion was rebuffed by Family Dollar's board, so on Wednesday the General announced that it would take the offer directly to investors.
Dollar General's bid to expand its empire of deep discount stores is going hostile. It's offering Family Dollar investors an all-cash offer of $80 a share. The hostile tender offer expires on Oct. 8.
Dollar General has its reasons for going over the wishes of Family Dollar's board to complete this transaction. Even if you're not invested in any of the discount retailers, a hostile takeover bid is always entertaining to follow.
Buck Rogers
Dollar General isn't the first deep discount retailer to make a play for Family Dollar this summer. This whole saga started in late July when Dollar Tree (DLTR 3.08%) offered to buy Family Dollar for $74.50 a share in cash.
A popular dollar store chain snapping up a deep discounter seemed like a no-brainer, and Dollar Tree was offering a 22% premium to Family Dollar's stock. The $8.5 billion deal would result in a markdown mammoth with 13,000 stores across North America. Dollar Tree won its own investors over by playing up the $300 million in annual overhead that could be shaved at the combined company.
Given Family Dollar's meandering ways -- it had missed Wall Street's profit estimates for three quarters in a row, with analysts eyeing declining profitability on flat sales for the recently concluded fiscal year -- this deal seemed like a win-win deal. Family Dollar investors would get taken out at a reasonable premium, and Dollar Tree would expand its reach as it takes advantage of the synergies.
Everything seemed to be leading up to merry nuptials, but just when it seemed as if Dollar Tree was about to be given the all clear to kiss the bride, Dollar General shouted "I object" from the back of the chapel.
A few dollars more
Dollar General -- realizing that it had plenty to gain in grabbing the 8,200-store Family Dollar, or at least keeping it away from Dollar Tree -- stepped in with an unsolicited offer. Offering investors $80 a share represented $640 million more to shareholders cashing out.
Family Dollar's board stuck to the friendlier deal that it had brokered with Dollar Tree, even if it meant less money for its own investors on the surface. This happens often. Friendly takeovers often have provisions for existing leadership to remain in place, while unsolicited takeover attempts often come with the intention of dismantling the existing board and executive team. However, this wasn't a case of Family Dollar's board putting its own interests above its stakeholders. The board instead said it rejected Dollar General's higher bid because it felt there was less of a chance that it would go through.
A proposed combination of Dollar General and Family Dollar could pose antitrust roadblocks, and not just because Dollar General rings up more than double in sales as Dollar Tree. Dollar General and Family Dollar are similar deep discounters offering general merchandise at various low price points. Dollar Tree, meanwhile, is a more conventional dollar store in which everything costs a buck or less.
Family Dollar and its advisers reviewed Dollar General's offer, unanimously concluding that it would not likely gain approval from regulators. Dollar General doesn't see it that way. It sees a combination of Family Dollar and Dollar Tree as a small fry compared to Wal-Mart (NYSE: WMT). As Wal-Mart expands deeper into the country with smaller stores it would seem regulators should not balk at a combination of the two leading deep discounters.
Wal-Mart plans on opening up to 300 of its small stores this year, doubling its initial forecast. It's reportedly in the process of rebranding its Wal-Mart Express stores under the Neighborhood Markets banner. The move would validate Dollar General's contention that it is being challenged by an even larger player. With Wal-Mart even testing out a convenience store concept, can any antitrust regulator really feel Dollar General and Family Dollar would get in the way of competition?
This saga is far from over. It's now up to Family Dollar shareholders to see which way they want to go. But with the stock trading higher than Dollar Tree's initial offer, it's pretty clear what they're not willing to settle for at this point.
