Family Dollar (NYSE:FDO.DL) has delayed a shareholder vote on Dollar Tree's (NASDAQ:DLTR)merger offer because too few investors attended its annual shareholder meeting last week. Without enough votes to approve the proposed $8.5 billion deal, Family Dollar postponed the decision for a month.
But shareholders are unlikely to move forward with a vote until they understand just how the Federal Trade Commission will rule on a rival bid by Dollar General (NYSE:DG), which means the decision could be delayed far longer.
Let's explore why some investors believe Dollar General's offer is a better option and what's holding Family Dollar back.
It's a superior offer
Dollar General is willing to pay $9.1 billion cash for Family Dollar, or $80 a share. That makes it better than the $8.5 billion, $75 a share offer from Dollar Tree, which comes in the form of cash and stock.
Family Dollar might have been able to wrangle more out of Dollar General, but it can't release any additional non-public information because of an agreement with Dollar Tree. And since Dollar General doesn't have access to Family Dollar's books, it hasn't been willing to raise its offer even more.
Complementary deep-discount businesses
Family Dollar operates more than 8,000 stores in 46 states, while Dollar General has over 11,500 locations in 40 states.
Both companies operate under a multi-price point policy. The majority of Family Dollar's products are priced under $10, with 22% of them going for $1 or less. Dollar General also prices most of its goods under $10, but offers about a quarter of them for $1 or less.
In contrast, Dollar Tree's namesake stores price everything at the $1 price point, which suggest its pricing patterns are not as compatible with Family Dollar as compared to Dollar General.
Wal-Mart certainly seems to recognize this and is putting more energy and resources into building out its footprint of smaller sized stores that will allow it to get even closer to customers. The 15,000 square foot Neighborhood Markets is closer in concept to the dollar stores chains, which run about 8,000 square feet in size, than its previous 180,000 square foot supercenters.
But the grass isn't always greener
Money and synergies aren't everything, however, and that's partially behind Family Dollar's continued resistance to Dollar General's overtures. There remain high antitrust hurdles to get over, and management is trying to preserve its own position.
Dollar General may have to close far more stores than it has estimated -- perhaps as many as 4,000 -- which would make a merger much less attractive and is likely why it hasn't committed to a so-called "hell or high water" provision where it would do whatever is necessary to make a deal happen.
And while Dollar Tree has offered to retain Family Dollar's current management after a merger is completed, Dollar General hasn't made such a commitment. Investors can't ignore the power this might have on management's decision-making. They might still feel Dollar Tree is the overall better bid, but keeping their jobs shouldn't be a quid pro quo for accepting Dollar General's offer.
While each offer may carry pros and cons, Family Dollar should seriously consider its options for the sake of its shareholders.