By Paul Ziobro
Dollar General Corp. on Thursday said it faced higher hurdles
from antitrust regulators in Washington than anticipated in its
pursuit to acquire Family Dollar Stores Inc.
Analysts said the company's statement effectively conceded
defeat in the seven monthlong fight between the country's three
dollar-store companies.
The discount retailer criticized the Federal Trade Commission,
alleging the agency used a controversial model to review its
all-cash $9.1 billion bid to buy Family Dollar, whose shareholders
are due to vote next week on whether to accept Dollar Tree Inc.'s
rival cash-and-stock bid worth $8.7 billion.
An FTC spokeswoman declined to comment
Despite the ticking clock, Dollar General didn't indicate
whether it would increase its bid and said it would need more time
to get its offer through regulators.
Momentum appears now to be behind Dollar Tree's bid, which on
Wednesday garnered support from proxy advisers Institutional
Shareholder Services and Glass Lewis & Co.
Earlier this week, Dollar Tree said it was running low on
patience and signaled it might pull its offer if next week's vote
didn't go ahead.
"We consider a potential [Dollar General-Family Dollar] tie-up
to be dead," analysts at FBR & Co. wrote in a note to
investors. "At this point we think a [Dollar Tree-Family Dollar]
combination is a done deal."
In previously rejecting Dollar General's offer, Family Dollar
had argued the bid would face strong regulatory resistance because
fortifying the nation's biggest dollar-store company could hurt
price competition among retailers at the lowest end of the
household-goods market.
In contrast, a combination of No. 2-ranked Family Dollar and No.
3 Dollar Tree could be more palatable to regulators because it
would create a bigger rival to compete against No. 1 Dollar General
and other bigger discount chains, such as Wal-Mart Stores Inc.
In addition, Dollar General and Family Dollar have more-similar
business models, with both selling household merchandise at a range
of prices, while the smaller Dollar Tree sells everything at a
dollar.
Growth of online competition in recent years has helped allay
concerns from federal antitrust regulators that consolidation in
the retail sector would lead to higher prices for consumers. But
Family Dollar said its antitrust discussions included evidence that
Dollar General was a big factor in determining its prices. Among
the findings: prices at far more than 1,500 Family Dollar stores
are set solely on whether a Dollar General is nearby.
But Dollar General has maintained it would be able to clear
antitrust hurdles and wouldn't need to divest more than the 1,500
of its stores it had been willing to shed to get the deal done.
It appears Dollar General's conviction that its bid would clear
regulators was thrown for a loop by the FTC's methodology to
evaluate the pricing impact of consolidation. "The FTC has departed
from the approach used to analyze retail mergers over recent years
and has instead relied heavily on an untested theoretical model for
predicting circumstances in which pricing will increase," Dollar
General said. "The use of this model as a predictor of the
likelihood of price increases is controversial."
The company said it believed it would be able to keep the store
divestitures below 1,500, especially if Family Dollar were to
become "an ally" in the discussions with regulators.
Still, Dollar General said its engagement with the FTC is
continuing but that it wouldn't be able to comply with an
additional step in the FTC's request for information until Feb. 10,
which is well after the Jan. 22 Family-Dollar shareholder vote on
the Dollar Tree offer.
Antitrust lawyer Michael Keeley of Axinn, Veltrop &
Harkrider LLP said Dollar General has been boxed into a corner
because the FTC can effectively veto a hostile bid that raises
potential antitrust issues without needing to file a legal
challenge. "Dollar General can't move to close the deal because its
bid is hostile and shareholders think there is [an] FTC risk," Mr.
Keeley said.
-Brent Kendall and Michael Calia contributed to this
article.
Write to Michael Calia at michael.calia@wsj.com
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