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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