Dollar General Offers Major Antitrust Concessions as It Lifts Bid for Family Dollar

Updated from 7:29 a.m. EDT with comments from Family Dollar, Dollar General and analysts.  

NEW YORK (TheStreet) -- Dollar General (DG)  raised the stakes in its competing bid for Family Dollar (FDO) , offering $80 a share in cash and major antitrust concessions that may force the two discount retailers to the negotiating table after a one-month standoff.

Dollar General said Tuesday it would increase its takeover bid for Family Dollar, while also offering two major concessions: a $500 million reverse termination fee in the event antitrust regulators nix the deal, and a promise to divest up to 1,500 stores if the Federal Trade Commission orders the company to do so.

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That higher bid, combined with significant antitrust concessions, may force Family Dollar to the negotiating table. Family Dollar has so far rejected Dollar General's attempts at a merger, instead recommending investors support a $74.50 a share cash-and-stock offer from Dollar Tree (DLTR) , which comes with lower antitrust hurdles and has the support of CEO Howard Levine and hedge fund Trian Management, who own a combined 16% of the company's outstanding shares.

Read More: The Ball is in Dollar General’s Court

Trian, an activist hedge fund with a seat on Family Dollar's board, has raised concerns about the antitrust risks of a merger with Dollar General. It will be interesting to see if Dollar General's reverse termination fee and its agreement to divest up to 1,500 stores changes Trian's opinion.

Previously, Dollar General had offered Family Dollar shareholders $78 a share in cash and a promise to divest up to 700 stores, an offer Family Dollar and its board found insufficient to break its existing deal with Dollar Tree.

Dollar General also said it added law firm Boies, Schiller & Flexner to its review of antitrust work. Already, the company has relied upon Simpson Thatcher & Bartlett and economist Compass Lexecon to do its antitrust analysis.

"We are confident that our enhanced proposal sufficiently addresses any concerns that led Family Dollar's Board of Directors to reject our prior proposal without any discussions between our companies," Rick Dreiling, Dollar General's CEO, said in a statement. "Even as a secondary antitrust review supported our previous proposal, we revised our offer to demonstrate the seriousness of our commitment," he added.

Family Dollar confirmed it had received Dollar General's offer, but the company said its board is reviewing the proposal and hasn't made a recommendation.

Shares in Family Dollar were rising less than 1% to $80.20, while Dollar General shares were trading higher at $64.40 in Monday morning trading.

Breaking A Dollar Deal

If Family Dollar breaks its deal with Dollar Tree, the company will be on the hook to pay a $305 million termination fee. That move may also create a bidding war between Dollar General and Dollar Tree for Family Dollar.

Analysts generally believe Dollar Tree can pay north of $80 a share for Family Dollar given the expected synergy of a merger, but that Dollar General may be able to pay nearly $90 a share given annual synergies forecast at between $550 million and $600 million within three years of a deal's close.

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Antitrust or Operational Improvement?

While Family Dollar and Dollar General are direct price competitors and do operate in many of the same geographies, S&P Capital IQ equity analyst Efraim Levy said in a Thursday telephone interview he believes a merger between the two companies would be about increasing operational performance, and not removing a competitor from the market.

Dollar General's Dreiling said on a conference call Thursday with analysts he believes 20% of synergy estimates would come from better category management, with another 40% coming from procurement and merchandising synergies and a remaining 40% coming from reductions to the combined company's sales, general and administrative expense.

In recent quarters, Family Dollar has earned nearly $55 in sales per square foot, over 15% more than what Family Dollar earns per square foot across its more than 8,000 stores. Some analysts believe that gap in performance is indicative of structural issues like Family Dollar's high exposure to urban markets. However, implicit in Dollar General's synergy guidance is the assumption it can operate legacy Family Dollar stores more effectively, potentially closing the gap between both companies.

Dollar General said in a letter addressed to Family Dollar it believes WalMart (WMT) is the company's primary competitor, potentially downplaying antitrust concerns. Dollar General also noted about 75% of the its stock keeping units (SKUs) are priced nationally and not by geographic zones.

Furthermore, as a "fill-in" destination for food, beverage and household product consumers, Dollar General said it competes against mass retailers, club stores, drugstores and groceries, and independent retailers. "Each of the above retail outlets sells the sort of items that Dollar General sells, and there is nothing unique about these products," Dollar General said in its letter.

Credit Suisse analyst Edward Kelly said in a note Tuesday that he agreed with Dollar General's assessment of the market and believes "there is a strong likelihood" the company wins in its bid for Family Dollar. [A]ntitrust should not derail this transaction," Kelly wrote, while noting his belief that a combination of Dollar General and Family Dollar makes more strategic sense than Dollar Tree's proposed offer. 

Ultimately, antitrust may prove a weak defense for Family Dollar as it continues to recommend a merger with Dollar Tree to its shareholders. Watch for the response of key shareholders such as Trian Management as to whether Dollar General’s latest bid is a credible effort.

Read More: Family Dollar's Lost Way Leads to Peltz and Icahn

-- Written by Antoine Gara in New York

Follow @AntoineGara

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