Discount retail battle heats up
DOLLAR General has offered to buy Family Dollar Stores for $8.95bn, trumping an offer by Dollar Tree, to strengthen its position as the top US discount retailer.
The offer of $78.50 per share in cash represents a premium of 3.2% to Family Dollar’s Friday close.
Family Dollar’s shares were trading at $79.76 before the bell yesterday, above the offer price. Dollar General’s shares were up 11% at $63.64.
“I think Dollar Tree would want to come back with something. Both Dollar General and Dollar Tree have some capacity to go a little bit higher with the offer price,” Telsey Advisory Group analyst Joseph Feldman said.
Dollar General made the offer, at an enterprise value of $9.7bn, in a letter to Family Dollar’s board yesterday. Dollar Tree last month offered $8.5bn, or $74.50 per share in cash and stock, at an enterprise value of $9.2bn.
Billionaire investor Carl Icahn had pushed Family Dollar, the number two US discount retailer, to sell itself to Dollar General. Mr Icahn has been cutting his stake in Family Dollar since Dollar Tree made the offer.
Dollar General CEO Rick Dreiling said he would stay on as CEO of the combined company until end-May 2016. Dollar General said in June that he would retire next year.
Dollar stores have struggled in a weak US economy as Wal-Mart and other large retailers chase penny-pinching consumers by offering more items priced at $1 or less.
Family Dollar’s presence is biggest in Texas and the eastern US. Dollar General has more than 1,000 stores in Texas. The similarity in store base would give the merged company more negotiating power with vendors, Mr Feldman said.
Dollar General said a deal would create a group with nearly 20,000 stores in 46 US states and sales exceeding $28bn.
Dollar General and Family Dollar offer general merchandise at multiple price points, while Dollar Tree offers items priced $1 or less.
Dollar General said a deal would add to its earnings in double-digit percentage terms in the first year after it closes.
The company said it expected annual synergies of $550m-$600m three years after the deal closes. Dollar Tree had said it expected $300m in annual savings by 2018.
Dollar General said it was prepared to divest up to 700 retail stores to get regulatory approval for the deal. In percentage terms, this is the same as Dollar Tree proposed.
Dollar General said it had financing from Goldman Sachs and Citigroup Global Markets for the deal, including a $305m termination fee payable to Dollar Tree.