Dollar General gets aggressive with new $9.1B bid for Family Dollar

Dollar General upped its bid for the rival Family Dollar chain and addressed an earlier roadblock, saying that it will more than double the number of stores it would shed to tamp down the antitrust concerns of its takeover target.

The newest bid is worth $9.1 billion, or $80 per share, up from $78.50 per share in the previous offer.

Family Dollar, based in Matthews, North Carolina, rejected the earlier bid in favor of a lesser offer of $8.5 billion from Dollar Tree Inc., saying that regulators were less likely to stand in the way.

On Tuesday Dollar General, the country's largest dollar-store chain, said it would divest as many as 1,500 stores, well above the 700 that it had originally agreed to, in order to sidestep any anti-monopoly actions that regulators might pursue.

The Goodlettsville, Tennessee company has also said it will pay a $500 million reverse break-up fee to Family Dollar Stores Inc. if the deal hits antitrust roadblocks.

Dollar General Chairman and CEO Rick Dreiling said that a second antitrust review supported its prior bid, but that its offer was revised "to demonstrate the seriousness of our commitment."

The businesses of Family Dollar and Dollar General are more similar than Dollar Tree's. The first two sell items at a variety of prices while at Dollar Tree, all items are a buck.

Family Dollar has been looking for a lifeline after running into some financial stress, shuttering stores and cutting prices. In June one big shareholder, Carl Icahn, urged the company to put itself up for sale.

Family Dollar acted one month later, accepting an offer from Chesapeake, Virginia-based Dollar Tree Inc. of $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share held. The companies valued the transaction at $74.50 per share at the time. Including debt and other costs, Family Dollar and Dollar Tree estimated the deal to be worth approximately $9.2 billion.

Last month Dollar Tree Inc. made an $8.5 billion bid for Family Dollar. It offered to pay $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share they own. The companies put the value of the transaction at $74.50 per share at the time. Including debt and other costs, the companies estimated the transaction to be worth approximately $9.2 billion.

Dollar General  has said that its offer would create a business with almost 20,000 stores in 46 states and sales of more than $28 billion. The Goodlettsville, Tennessee, company anticipates annual savings of $550 million to $600 million three years after the transaction closes.

Dollar stores grew during the recession as people across income groups searched for cheaper options. To attract a broader array of customers, they also expanded their offerings to include more groceries and brand-name products, instead of just the party favors and other knickknacks people often associated with them.

More recently, however, sales at dollar stores have been suffering because the lower-income customers who go to them are facing persistent job instability and slow wage growth in the aftermath of the recession. Wal-Mart Stores Inc. and Kroger Co. also have been opening smaller store formats to directly compete with dollar stores.

After enjoying rapid expansion during the recession, Family Dollar has stumbled in recent months, announcing the closure of 370 stores back in April. As the Monitor's Patrick Jonsson reported in April, bad news for dollar stores could mean good news for the US economy: 

That turnarnound in investor sentiment may suggest a rumble of change in the American economy. After a half-decade of economic headwinds, Americans are, bit by bit, feeling richer as household worth has hit 5.1 percent annual growth. That, in turn, means more Americans may be eschewing the cut-rate merchandisers in favor of Walmart or even the mall.

“The current recovery period has been characterized by slower growth in household asset values than in previous recoveries, and until recently, muted growth in house prices,” writes LaVaughn Henry of the Cleveland Federal Reserve in a February analysis. “However, despite consumers being somewhat constrained in their ability to draw from expanding income and wealth sources during the recovery, the growth in their consumption remains stronger than one might expect.”

Others doubt that trend is really what’s at work in the dollar store segment. Americans are saving more than before the recession, and food stamp spending continues to rise, suggesting that the bargain lot business is still a good one, writes John Aziz in The Week.

“While the economy is recovering as a whole, times are still very tough for a lot of people – including most of those who make up dollar stores’ target audience,” writes Mr. Aziz. 

Family Dollar blamed the harsh winter for its disappointing returns, with profits down by 14 percent. But analysts say hefty local competition from other ultra-discounters and just regular discounters like Target and Walmart is what may really be at play.

“The saturated low-end marketplace makes it even more important for each retail chain to run a tight ship,” writes Business Week’s Kyle Stock. “The company with the best management … is the one that can afford to offer the lowest price.” 

Shares of Family Dollar added 67 cents to $80.50 in premarket trading Tuesday, while Dollar General's stock gained $1.08 to $65.07.