Family Dollar announced Friday morning that its board of directors has spurned rival Dollar General's latest buyout offer due to continued concerns over antitrust issues.
The announcement comes just three days after Dollar General increased its offer for the discount retailer and added safeguards aimed at soothing Family Dollar's concerns that the deal would run afoul of federal antitrust regulations.
Family Dollar, based in suburban, N.C., wasn't convinced.
"Our board of directors, with the assistance of outside advisers and consultants, reviewed all aspects of Dollar General's revised proposal and unanimously concluded that it is not reasonably likely to be completed on the terms proposed," CEO Howard Levine said in a statement. "There is a very real and material risk that the transaction proposed by Dollar General would fail to close, after a lengthy and disruptive review process."
The board reaffirmed its support for a deal with Virginia-based Dollar Tree, which Levine said "delivers attractive value in the form of immediate upfront cash and upside participation in a combined Dollar Tree-Family Dollar entity, as well as closing certainty."
Family Dollar, founded in Charlotte in 1959, announced in July it had reached agreement on a $74.50 per-share cash-and-stock deal with Dollar Tree. But larger Tennessee-based rival Dollar General last month offered to buy Family Dollar in a $78.50 per-share all-cash deal – $4 a share, or 5.4 percent, higher than the Dollar Tree offer.
Family Dollar rejected Tennessee-based Dollar General's offer four days after the unsolicited bid emerged. On Tuesday, Dollar General increased its offer to $80 per share and said it would be willing to divest itself of as many as 1,500 stores to avoid problems with federal antitrust regulators.
Dollar Tree and Family Dollar use different retail strategies — everything at Dollar Tree sells for $1, while Family Dollar has many price points. Dollar General, on the other hand, has a business model virtually identical to Family Dollar. Analysts have said that means more duplicate functions could be cut in a merger, likely at the headquarters.
Family Dollar contends the overlap between its model and Dollar General's makes it more likely antitrust regulators will frown on a deal with Dollar General.
Family Dollar and Dollar Tree, in press releases issued Friday morning, said they are accelerating their timeline to close their deal, expecting to do so by the end of November.
They also said Dollar Tree is willing to divest itself of as many stores as necessary to obtain approval from federal regulators. The companies said they expect the Federal Trade Commission to request more information on their deal next week, but added that they ultimately expect approval.
Their deal, as amended, "is clearly superior to Dollar General's revised proposal based on antitrust risk, deal certainty and time value of money," Dollar Tree CEO Bob Sasser said in a statement. "Unlike Dollar General, we expect to be required to divest few, if any, stores because our business model is significantly different from Family Dollar's model."
Dollar General said Friday that it is evaluating next steps and remains committed to acquiring Family Dollar. The firm has previously said if Family Dollar's board doesn't enter into discussions on its deal, it will take its offer directly to Family Dollar's shareholders.
Analysts who follow the companies have said shareholders might have a difficult time saying no to Dollar General's offer. Some have said Dollar General can afford to increase its bid to as much as $90 per share.
BB&T Capital Markets analyst Anthony Chukumba and associate Dan Cannata said in a research note to clients that they were surprised Family Dollar turned down Dollar General's revised offer.
They said Family Dollar remains a "must have" for Dollar General since Dollar General's multi-year turnaround plan has petered out and it would face stiffer competition from a combined Dollar Tree-Family Dollar firm.
"While we are hard pressed at this point to predict the next chapter in this ongoing soap opera, we think Dollar General is likely to come back to the table with a revised proposal," they wrote.
Dollar General CEO Rick Dreiling, in fattening his firm's offer earlier this week, had suggested that a federal antitrust analysis would focus not on his firm's competition with Family Dollar, but instead would center on Wal-Mart, the main driver of Dollar General's strategic and pricing decisions.
Dollar General has said it began studying the antitrust issues more than a year ago. It also hired Richard Feinstein, former director of the Federal Trade Commission's antitrust enforcement bureau, to review the company's analysis.
Dollar General said Feinstein agreed with the company's belief that the original terms of its bid would have withstood scrutiny.
Dollar General has said it was so confident in its deal that it will pay a $500 million reverse breakup fee to Family Dollar should antitrust regulators block it.
Family Dollar and Dollar Tree took pains Friday to try to bat down Dollar General's antitrust analysis. Family Dollar listed eight bullet points in its press release outlining why Dollar General's deal poses greater risk. The law firm of Cleary Gottlieb, which represents Coca-Cola and other large corporations on mergers and acquisitions, is advising Family Dollar.
Family Dollar's press release also quoted one of its board members, Ed Garden, as saying the breakup fee holds an after-tax value of less than $3 a share and "does virtually nothing to compensate the Family Dollar shareholders for assuming that risk" of antitrust troubles.
Garden is co-founder of Trian Fund Management, a major Family Dollar shareholder. The BB&T Capital Markets analysts said Family Dollar's board must be deeply concerned about the antitrust issues, since Trian would potentially leave $46 million on the table by staying with the Dollar Tree offer.
The stakes are also high for Family Dollar's 1,400 corporate employees who work in suburban Charlotte.
The proposed Dollar Tree deal envisions Dollar Tree and Family Dollar keeping many of the corporate jobs there. Levine would stay on at the combined company for at least two years, reporting to Dollar Tree's Sasser. Dollar Tree also plans to keep the Family Dollar name on many of the combined company's stores.
Dollar General hasn't said what it might do with the Matthews headquarters jobs or the Family Dollar name, or what Levine's role would be.
Levine sent employees a memo Friday updating them on the latest developments.
One employee who asked to remain anonymous said workers are worried, and turnover is increasing.
"Morale is definitely down at headquarters," said the worker, who wasn't authorized to speak publicly about the situation. "There is a lot of anxiety and trepidation. But nobody has let their foot off the gas. We want to serve the customers."
Family Dollar stock fell about 1 percent to $79.19 per share in mid-afternoon trading.
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(Charlotte Observer staff writer Rick Rothacker contributed to this report.)
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