By Michael Calia 

Dollar General Corp. made an $8.95 billion counterbid on Monday for rival Family Dollar Stores Inc., topping the offer made three weeks ago by Dollar Tree Inc.

Dollar General, the biggest so-called dollar store chain, has long been considered a logical buyer of Family Dollar, and Chief Executive Rick Dreiling expressed surprise at the deal reached between his two rivals on Monday's conference call. He added he had shown interest in a deal with Family Dollar multiple times over the past few years.

A deal would allow Dollar General to broaden its footprint in rural markets while giving it access to Family Dollar's presence in urban areas at a time when retailers are locked in a fierce battle to attract consumers.

Shares of Family Dollar climbed 4.8% premarket to $79.74, topping the per-share offer price of $78.50. Dollar General jumped 11% to $63.65, while Dollar Tree edged down 1.8% to $54.60.

Representatives for Family Dollar and Dollar Tree didn't immediately respond to requests for comment.

The combination of Dollar General and Family Dollar, the second biggest deep discounter, would have about 20,000 stores in 46 states, with sales of more than $28 billion, Dollar General said. By comparison, the combination of Family Dollar and Dollar Tree--the smallest of the three--would create a company with more than $18 billion in sales.

Dollar Tree's bid for Family Dollar, made late last month, is worth about $8.5 billion, or $74.50 a share, in cash and stock, while Dollar General's offer is all cash.

Dollar General was thought to be deterred by the involvement of activist investor Carl Icahn. Dollar Tree said in a regulatory filing last week that another unnamed retailer--Dollar General, according to a person familiar with the matter--was reluctant to bid for Family Dollar if it meant negotiating with Mr. Icahn.

Mr. Dreiling of Dollar General said Monday that he would postpone his retirement-- originally slated to happen by the end of May of next year--to remain as the head of the combined company through May 2016 and added that he may not have announced his retirement if he had known Family Dollar were in play.

The executive has been credited with expanding Dollar General's product offerings, adding more stores and boosting sales during a difficult time for the U.S. economy. His retirement was thought to be a blow for Dollar General's merger prospects.

Mr. Dreiling didn't address succession plans, or whether Family Dollar leadership would have a role in a combined company, beyond saying that Dollar General has deep bench in its executive ranks and that there are many talented executives at Family Dollar. Todd Vasos, Dollar General's operating chief, would oversee a potential integration of the companies, Mr. Dreiling added.

The dollar store chains thrived during the recession as the number of working Americans living in poverty increased by nearly 40%, according to the U.S. Bureau of Labor Statistics.

The stores appealed to cash-strapped shoppers with bargain-basement prices and locations that were closer to their homes than many Wal-Mart supercenters. The smaller package sizes of everyday items like laundry detergent and cereal fit into the budgets of consumers living paycheck to paycheck.

While the three chains featuring "dollar" in their names, they have different strategies. Dollar Tree sells all of its items for a dollar or less, and is focused mainly on the suburbs. Family Dollar sells items at a range of discounted prices, mostly targeted at lower-income markets in urban and rural areas. Dollar General, meanwhile, also sells items at a variety of discounted prices, while focusing mainly on rural markets.

Despite general positive trends for dollar stores, Family Dollar has struggled as it raised some prices in a bid to offset some deeper discounts. At the beginning of the year, the company backed off the strategy and cut prices on about 1,000 items while also announcing plans to close 370 locations this year and slow the pace of new openings.

Mr. Dreiling chalked up Family Dollar's recent struggles to a variety of issues.

"It's a combination of a lot of little things that all add up at the end of the day to one big thing," he said Monday, citing product mix, pricing and store layout. He said that Family Dollar stores would look like Dollar General stores on the inside after a potential integration, although he said it was unclear whether there would be changes to the stores' banners.

Dollar General said it would expect a deal with Family Dollar to generate synergies of $550 million to $600 million on an annual run rate three years after it closes. The company also said it would be prepared to divest 700 stores in order to avoid antitrust issues.

It added Goldman Sachs and Citigroup Global Markets Inc. have agreed to provide financing for a deal, including for the $305 million termination fee Dollar Tree would get if Family Dollar ends their deal.

Mr. Icahn had pressured Family Dollar to put itself up for sale, while saying a deal with Dollar General would make sense. Late last month he said he was pleased with Family Dollar's deal with Dollar Tree, although he said he remained hopeful that another potential suitor would emerge with a higher offer.

Mr. Icahn's firm cut its investment in Family Dollar to 3.61% over the two days following the announcement of the Dollar Tree deal, saying better returns could be achieved by deploying the money elsewhere instead of waiting for the deal to close or for a new suitor to come along. His stake had previously been 9.39%.

Write to Michael Calia at michael.calia@wsj.com

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