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Dollar General today offered a rival bid to purchase Family Dollar Stores Inc., estimated at $ 9.7 billion, in an effort to derail Chesapeake, Va.-based Dollar Tree's recent $8.5 billion offer, made just last month.
If accepted, the merger would position Dollar General as the nation's largest small-box discount retailer, worth roughly $28 billion, with nearly 20,000 stores in 46 states.
Under the agreement, Dollar General would offer $78.50 per share for the company, trumping Dollar Tree's $74.50 per share –- which comprises $59.60 in cash and the equivalent of $14.90 in Dollar Tree shares.
Dollar General's offer also includes a $305 million termination fee, payable to Dollar Tree, for the dissolution of the existing merger agreement, should Family Dollar pursue the deal with Dollar General.
Dreiling to Helm Combined Company
Rick Dreiling, chairman/CEO of Goodlettsville, Tenn.-based Dollar General, has agreed to postpone his retirement and lead the combined company until May 2016 if an agreement is signed.
“For Dollar General shareholders, the proposed combination of Dollar General and Family Dollar would be a significant strategic opportunity to create immediate and lasting shareholder value," Dreiling said in a statement. "For both Dollar General and Family Dollar customers, we would be able to provide better value and greater selection."
According to Dollar General, the company's offer would generate synergies of $550 million-$600 million within three years of closing, derived from improved merchandise offerings and store presentation, as well as efficiencies in purchasing, sourcing, distribution and transportation.
To alleviate antitrust concerns, Dollar General also said it would sell off 700 stores.
Competition in the Discount Retail Segment
Consolidation in the discount retail segment is likely being spurred by increased competition, both as dollar store expansion heats up and big-box grocers and supermarkets make a play in the low-price grocery space, according to Kelly Tackett, research director for Planet Retail North America.
"While the addition of more consumables to the dollar store offer has increased shopper trips to the format, it also has brought the channel into more direct competition with big-box grocers and supermarkets, who are responding with their own price-oriented formats," Tackett said, noting Walmart's small-store expansion as a particular looming threat. "The increased price pressures associated with the ramped up competition also are compressing already razor-thin margins in the value channel."
Tackett added that Charlotte, N.C.-based Family Dollar's acceptance of Dollar General's offer and dissolution of its deal with Dollar Tree would make the most sense from an operating model perspective, noting that, although Family Dollar has made some recent "missteps," the company is a "worthwhile prize and one that will be the subject of some back and forth between its suitors."
Representatives from Family Dollar and Dollar Tree did not respond to requests for comment.