Family Dollar shareholders are scheduled to vote Thursday on the competing takeover bid from rival Dollar Tree (NASDAQ:DLTR). Facing this deadline, Dollar General has resorted to pleading for more time to comply with regulatory hurdles the Federal Trade Commission threw in its path. It all but acknowledges that what Family Dollar has maintained all along is true, that the FTC would require Dollar general to divest itself of as many as 4,000 stores before the deal could be done, and not the 1,500 Dollar General previously said it would need to close.
That means Family Dollar shareholders will in all probability accept Dollar Tree's offer, which will require closing about 300 stores.
The regulatory agency has been asking questions about Family Dollar's pricing practices when it competes against its two rivals. Under the dollar store chain's "pricing rules," when it goes head-to-head against Dollar Tree, prices don't change all that much, with only a handful of its stores lowering prices. When there is no Dollar Tree in the same market, even fewer stores raise prices.
It's a completely different scenario when matched up against Dollar General: Some two-thirds of Family Dollar's stores will lower their prices in the face of such competition, while just under half will raise them when there's no Dollar General around.
The difference is likely due to the nature of the business. Despite all the companies operating "dollar stores," Dollar Tree is really the only major pure play in the industry with everything in its stores priced at $1. Both Dollar General and Family Dollar offer multiple price points, with only a quarter or less of their products priced at $1.
That makes them much more similar operations, and explains why Dollar General is trying to acquire its rival to better compete against Wal-Mart, which is increasingly encroaching on its turf.
Backed into a corner
By asking for more time to meet the FTC's objections -- while at the same time criticizing the agency for adopting a different standard in this merger than it has in similar retail deals -- Dollar General is effectively acknowledging it can't win.
Dollar Tree has thrown down the gauntlet to Family Dollar and its shareholders. It says it won't brook any additional delays for a vote on its $8.5 billion offer, having allowed two postponements already. Family Dollar either keeps to the vote scheduled for this week, or Dollar Tree will walk away and leave Family Dollar to pick up the tab on a $305 million breakup fee.
Dollar General might be right that the Federal Trade Commission is using a different standard in this case, but the retailer is only offering Family Dollar shareholders a slight premium to Dollar Tree's bid and has apparently refused to increase its offer as an incentive for holding off any longer. Investor proxy firms Institutional Shareholder Services and Glass Lewis also endorsed Dollar Tree's offer last week, citing the growing risks associated with Dollar General's bid.
All of this means Family Dollar investors will likely accept Dollar Tree's offer on Thursday.
A Pyrrhic victory
But that doesn't mean it's a done deal. Dollar Tree's management has said Family Dollar's continued poor quarterly performance is degrading the acquisition by raising its value, because Dollar Tree's own stock keeps rising (it's a cash-and-stock offer). I've outlined a number of other reasons Dollar Tree should not acquire Family Dollar, and it's not out of the question that Dollar Tree's shareholders could reject the merger altogether.
Family Dollar might win the battle against Dollar General's takeover campaign, but it could still lose the war.