(Adds Family Dollar comment)
By Sruthi Ramakrishnan and Devika Krishna Kumar
Aug 18 Dollar General Corp offered to buy
Family Dollar Stores Inc for $8.95 billion, trumping a
bid by Dollar Tree Inc that had threatened to unseat
the biggest U.S. discount retailer from the peak of a highly
Shares of Family Dollar, the No. 2 U.S. discount chain, rose
5 percent to $79.87, above the offer price of $78.50 per share
in cash, suggesting that investors anticipate a bidding war.
"Both Dollar General and Dollar Tree have some capacity to
go a little bit higher with the offer price," said Joseph
Feldman, analyst at Telsey Advisory Group.
Dollar stores have been a popular choice for U.S. consumers
in a weak economy. Competition to woo penny-pinching customers
has intensified, particularly as Wal-Mart Stores Inc has
opened more small-format stores.
" ... They are trying to rally forces in order to compete
more effectively," said Barbara Kahn, a professor at Wharton
University of Pennsylvania.
Many large retailers that cater to low- and middle-income
consumers reported disappointing quarterly sales at their
established stores last week, pointing to a cutback in spending
and a shift in preferences to stores nearer to home.
Sales at discount chains, however, have grown consistently
since 2009 as shoppers have been spending more cautiously.
The U.S. market for dollar stores grew 45.7 percent to $48.2
billion between 2008 and 2013 and is expected to grow 18 percent
in the next five years, according to Euromonitor International.
But the growth has recently started slowing due to intense
competition, Kahn said.
"We have a tremendous amount of strength in the rural
communities and we have things to learn in the metro," Dollar
General Chief Executive Rick Dreiling said on a conference call.
"Family Dollar is just the reverse."
A combined company will have nearly 20,000 stores across 46
U.S. states and annual sales in excess of $28 billion.
It would also allow Dollar General to retain its No. 1 spot
among U.S. dollar stores. Dollar Tree's $8.5 billion bid for
Family Dollar, announced on July 28, would have vaulted that
merged company ahead of Dollar General.
Combined, the three dollar chains' annual sales total about
$35 billion - less than a tenth of Wal-Mart's $473 billion.
Dreiling, who will postpone a retirement planned for next
year to stay on as CEO of the combined company through May 2016,
said Dollar General had faced stiffer competition from new
Family Dollar stores than from Wal-Mart.
Both Dollar General and Family Dollar offer goods at
multiple price points, while Dollar Tree sticks rigidly to a $1
or less format. This - along with the location of Dollar General
and Family Dollar stores - would make Dollar General a more
likely buyer, analysts said.
Family Dollar's presence is biggest in Texas and the eastern
United States. Texas is also home to more Dollar General stores
than any other state - more than 1,000 stores, or about a tenth
of the total.
Family Dollar said it is reviewing Dollar General's offer
and has not changed its recommendation in support for a merger
with Dollar Tree.
Dollar General's shares were up 11 percent at $63.75, while
Dollar Tree's shares were down 2 percent at $54.47.
Dollar General's offer, made in a letter to Family Dollar's
board, represents a premium of 3.2 percent to Family Dollar's
The enterprise value of the offer is $9.7 billion, higher
than Dollar Tree's $9.2 billion.
Billionaire investor Carl Icahn had pushed Family Dollar to
sell itself to Dollar General. Dollar Tree offered last month to
pay $74.50 per share in cash and stock.
Since then, Icahn has cut his stake in Family Dollar to 3.6
percent as of July 30 from 9.4 percent.
Activist investor Nelson Peltz-led Trian Partners was Family
Dollar's second largest shareholder as of July 27 with a 7.34
Dreiling, who said he would not have announced his
retirement had he known a deal between Family Dollar and Dollar
Tree was under way, said antitrust approval for Dollar General's
bid was not a concern.
Dollar General is prepared to divest up to 700 retail stores
to get regulatory approval for the deal, the same percentage
that Dollar Tree had proposed.
Edward Jones analyst Brian Yarbrough, however, said closing
700 stores might not be enough for Dollar General to get
"Any market where they are dominant, and they are the only
two players, is going to be questioned. They will either have to
be closed or sold," he said.
Dollar Tree declined to comment.
Dollar General said it expected annual synergies of $550
million-$600 million three years after the deal closes. Dollar
Tree had said it expected $300 million in annual savings by
Dollar General has financing from Goldman Sachs and
Citigroup Global Markets Inc for the deal, including a $305
million termination fee payable to Dollar Tree.
(Additional reporting by Shailaja Sharma in Bangalore; Editing
by Kirti Pandey and Robin Paxton)