NEW YORK (TheStreet) -- Maybe after almost a year of on-and-off speculation provided by Wall Street analysts, hedge fund investors and the media, Dollar General (DG - Get Report) simply isn't interested in buying Family Dollar (FDO). That appears to be the conclusion one can draw from a filing Family Dollar disclosed explaining its unexpected late-July sale to Dollar Tree for $8.5 billion in cash and stock.
Dollar General was repeatedly approached by Family Dollar about the prospect of a merger, the filing shows, however informal talks initiated in the fall of 2013 led nowhere. After Family Dollar began negotiating a merger with Dollar Tree in March and April, and billionaire activist investor Carl Icahn disclosed a near 10% stake in the company and called for its sale in June, Dollar General remained lukewarm about a deal.
On June 19, the company formally declined to begin M&A negotiations with Family Dollar. Just over a month later, Dollar Tree surprised Wall Street by announcing its cash and stock deal for Family Dollar, which stipulated that the Family Dollar brand would be left intact and CEO Howard Levine would take an executive role and board seat within the combined company.
Nevertheless, analysts who had forecast about $500 million in cost savings were Dollar General and Family Dollar to merge continued to argue that the a deal between the two companies was possible. Carl Icahn said on July 28 he was supportive of Family Dollar’s deal with Dollar Tree, but also "hopeful" a competing bid would emerge. Then, a Bloomberg report in early August said Dollar General hired advisers to look into a deal, but that odds of a counteroffer were a toss-up.
Now, a counteroffer seems unlikely.
"After reading today’s [Dollar Tree S-4], we think it’s less likely that Dollar General counters Dollar Tree’s $74.50 bid -- despite reports to the contrary. Given the extent of the negotiations, we believe it’s highly probable that Dollar General had an idea that a bid could be on the table for Family Dollar and still passed,” Sterne Agee analysts said in a client note on Monday evening.
The filing shows that talks between Family Dollar and Dollar General in October 2013 never made it past initial discussions, and that follow up meetings about a deal were either missed or rescheduled.
In January, hedge fund Paulson & Co. asked Family Dollar to begin a sale process and within a few weeks, the company formally hired investment bank Morgan Stanley to begin a strategic review of the company’s prospects as a merger target and as a standalone. Trian Management, a long-time activist shareholder in Family Dollar stock that gained a seat on the company’s board in late 2011, was given a key role in the company’s strategic review.
Ed Garden, a Trian executive, was appointed to a four-person board committee that would review Family Dollar’s options. Within roughly two months, Family Dollar, its advisers and its board committee were beginning to enter exclusive merger talks with Dollar Tree.
On April 7, Family Dollar and Dollar Tree signed a mutual non-disclosure agreement that ultimately led to their $74.50 a share cash and stock merger. Icahn began buying Family Dollar shares that same day, a filing shows.
Dollar General Warrants Outside Speculation
On the outside, it was Dollar General and not Dollar Tree that was receiving all of the press. At least five analysts published reports detailed why Dollar General might be a buyer of Family Dollar, citing significant cost savings. Carl Icahn, meanwhile disclosed a near-10% stake in Family Dollar shares on June 6 and called for the company to be sold, preferably to Dollar General.
The day after Icahn disclosed his stake, a member of Dollar General’s board told Family Dollar it wouldn’t negotiate a deal with the activist’s involvement. Icahn threatened to reach out to Dollar General directly, filings show, but on June 19, Dollar General formally rejected Family Dollar CEO Howard Levine's inquiries about a merger.
One source outside of Dollar General source told TheStreet that the company dispatched a team to kick the tires of a merger with Family Dollar in the fall of 2013, but ultimately concluded that Family Dollar’s weaker geographic presence, in addition to supply chain and inventory inefficiencies, presented too much of a hurdle for a merger.
Family Dollar and Dollar Tree began to negotiate their $74.50 a share cash and stock merger on June 20, and within just over a month, a merger was formally announced, with both Trian Management and Family Dollar CEO Howard Levine agreeing to vote their shares in favor of the transaction. Icahn, while he was supportive of the deal and even said it indicated shareholder "activism is alive and well," said he was hopeful an alternative bid would emerge. By August, Icahn pared his Family Dollar stake from nearly 10% to just 3.61%.
It would seem obvious most influential parties to Family Dollar’s long-speculated upon takeover have settled on Dollar Tree’s $8.5 billion offer. The lingering question is whether Dollar General was ever really interested, as endless speculation had indicated? Perhaps not.
Family Dollar declined to comment beyond its public filings. Dollar General and Carl Icahn didn't reply to requests for comment.
-- Written by Antoine Gara in New York