Currently, Dollar General is offering $78.50 a share in cash for Family Dollar and is accusing the company of negotiating in bad faith on a $74.50 cash-and-stock takeover with Dollar Tree (DLTR) in late July. However, Trian Management's deep involvement in Family Dollar's sale process and the firm's support of its merger with Dollar Tree may prove a hurdle Dollar General will find hard to overcome.
Trian Management was given a seat on Family Dollar's board in late 2011, as the discount retailer struggled to keep pace with its closest competitor Dollar General. When Family Dollar formally launched a strategic review in January and hired Morgan Stanley as an adviser, Trian Management executive Ed Garden was included in a four-person board committee to run the review.
Proxy documents released by Family Dollar earlier in August show that Family Dollar did reach out to Dollar General multiple times about a merger, and that the company did significant analysis on antitrust issues involved in a potential deal. As Family Dollar's strategic review progressed, Dollar Tree emerged as an interested buyer who was willing to move expediently toward a deal.
By April 7, Family Dollar and Dollar Tree signed a non-disclosure agreement on a potential deal. That same day, activist investor Carl Icahn began buying Family Dollar shares. Between April and Family Dollar's formal announcement of a merger with Dollar Tree, there has been a significant back-and-forth between the company and its investors, and with prospective buyers such as Dollar General.
Family Dollar's sale process now is being called into question by Dollar General and Icahn. While filings indicate that Family Dollar did reach out to Dollar General, CEO Rick Dreiling said on Monday he was shocked to find out Dollar Tree had been negotiating a merger. On Thursday evening, Dollar General CEO Dreiling said that had the company known Dollar Tree was working on a deal for Family Dollar, it would have acted swiftly.
Family Dollar did say on Thursday that because it had signed a NDA in April, it was prohibited from disclosing the existence of any discussions with Dollar Tree when negotiating with Dollar General in June.
Dollar General's competing $78.50 a share bid for Family Dollar was rejected on Thursday. Analysts, however, believe it would be almost impossible for Dollar General to not know that a merger between the company's two closest competitors was underway by June. Other Dollar General claims also don't fit facts laid out in Family Dollar's proxy.
Family Dollar's CEO Howard Levine has been accused by Dollar General and Icahn of not negotiating in good faith because he wanted to keep his job after the company's sale. While Levine will have an executive and board role in the combined Family Dollar and Dollar Tree, filings show that his role was the last thing negotiated in their merger.
Meanwhile, Trian Management's hand in the Family Dollar strategic review likely eliminates the prospect that an entrenched board pushed the Dollar Tree transaction. Trian, as many corporations know, is one of the toughest negotiators in the world of activist investing, and the firm played a crucial role in Family Dollar's strategic review.
Ultimately, Family Dollar's board concluded that the antitrust hurdles of a Dollar General were high, and far too risky given Dollar Tree's actionable offer.
"Consistent with its fiduciary duties, the Company's Board has sought to maximize shareholder value while considering the certainty of closing a transaction," Garden said in a press release on Thursday.
"The CEO of Dollar General said he believes that antitrust is not a risk but did not put forth a proposal that eliminates regulatory risk for Family Dollar shareholders. Given the significant antitrust issues involved with Dollar General's proposal, we will not jeopardize the Dollar Tree deal for a transaction with Dollar General that has a high likelihood of not closing due to antitrust considerations," he added.
There is a roughly 30% geographic overlap between Dollar General and Family Dollar stores. A Dollar Tree merger also involves antitrust issues. However, planned divestitures are smaller and geographic overlap is less than 20%, analysts calculated. Nonetheless, analysts that have advocated a merger between Family Dollar and Dollar General for years believe antitrust issues are workable.
For Dollar General to break Family Dollar's merger with Dollar Tree, it will ultimately have to prove that antitrust hurdles are solvable. Other issues of contest like a war-over-words regarding who knew what and when may prove to be a diversion.
Bottom Line: Because Trian signed onto the Dollar Tree deal, agreeing to vote its shares in favor of the merger, it will be hard for Dollar General to prove Family Dollar blundered in its sale process.
-- Written by Antoine Gara in New York