Dollar General Gets Antitrust Advice From New FTC Recruit

NEW YORK (TheStreet) -- Dollar General (DG) has hired Richard A. Feinstein, a Washington-based partner at Boies, Schiller & Flexner who was formerly a top antitrust official at the Federal Trade Commission, to increase pressure on Family Dollar (FDO)  to break its $8.5 billion merger with Dollar Tree (DLTR) and begin negotiating a new deal.

Feinstein's support of Dollar General's antitrust analysis and his resume convey the seriousness of the company's revised bid for Family Dollar, and are being used to undermine remaining objections related to antitrust. However, the ex-antitrust regulator is so fresh from the FTC he won't be able to argue in front of the commission on behalf of his newest client. 

Feinstein was director of the FTC's Bureau of Competition for a four-year stint that ended last June and he remains subject to a two-year cooling-off period. While a so-called "revolving door" between Washington and large corporations is commonplace, it is rare in large merger efforts that a company so publicly uses an independent counsel with close regulatory ties as a deal-making pressure point.

Dollar General is trying to remove antitrust as an issue that keeps Family Dollar from the bargaining table. On Tuesday, the company revised its bid for Family Dollar, offering $80 a share in cash for the discount retail chain and antitrust concessions including a $500 million reverse break-up fee and the divestiture of up to 1,500 stores if ordered to do so by the FTC. Family Dollar is reviewing the offer, but continues to recommend a $74.50 a share cash and stock merger with Dollar Tree that it says carries lower antitrust risk.

With Dollar General's new bid in hand, it may be harder for Family Dollar to continue putting off merger discussions and Feinstein may serve as an anchor for antitrust arguments. In a Tuesday letter to Family Dollar's board of directors, Dollar General CEO Rick Dreiling highlighted Feinstein's ties to the FTC:

[W]e have engaged Richard Feinstein of Boies, Schiller & Flexner LLP to independently review our thorough antitrust work. As you may know, until June of 2013 Mr. Feinstein was the Director of the Bureau of Competition at the FTC. After a review of our work completed to date, Mr. Feinstein has informed us that he concurs in our view that the transaction can be completed on the terms previously proposed.

Given our advisors' experience, as well as the extensive analysis we have performed, we have the highest confidence that our antitrust analysis and conclusions are correct. This leads us to believe that perhaps Family Dollar's advisors are analyzing this transaction as if it were a potential grocery store merger or utilizing data that tells a story much different than Dollar General's documents and data.

This proposed transaction is not a traditional grocery store merger, and we do not believe that the FTC will take this approach. Rather, as outlined further below, we believe that the FTC will evaluate this transaction as involving a "fill-in" shop/trip instead of a "destination" or "stock-up" shop/trip."

While Feinstein sides with Dollar General, if the FTC objects to the company's interpretation, he will be precluded from arguing in front of the commission because of a two-year cooling off period.

"If the merger were to get in front of the FTC, I would not be able to appear on behalf of Dollar General," Feinstein said in a Tuesday afternoon telephone interview with TheStreet. Presumably, Dollar General's primary counsel Simpson Thatcher & Bartlett would argue on its behalf were the prospective merger to go in front of the FTC.

Watch the video below to find out why TheStreet's Jim Cramer says he'd rather own shares of Dollar Tree than Family Dollar:


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The Antitrust Case

Both Dollar General and Family Dollar have yet to fully disclose their antitrust analysis for and against a merger, indicating a deal could be negotiated between the two parties. Were antitrust to remain a sticking point for Family Dollar and large investors like Trian Management, the hang-up would likely come from competing definitions of the market both companies operate in.

Dollar General believes it is a so-called "fill-in" retailer for consumers' consumable and household products shopping, and not a "destination" or "stock-up" retailers. As such, the company believes it competes primarily against Walmart (WMT) and secondarily against a broad market of retailers including quick stop marts, club stores, drugstores and groceries. The combined company would operate nearly 20,000 stores it would likely carry a sub-10% market share under such an expansive market definition.

In contrast, Family Dollar may define its market more narrowly as within the dollar store segment of the retail sector. With that definition, the concentration effects of a merger between Dollar General and Family Dollar might be comparable to recent grocery store mergers and be seen as unworkable.

Many analysts believe antitrust issues in a deal are manageable. Credit Suisse analyst Edward Kelly said on Tuesday he agreed with Dollar General's market definition and believes the company will eventually win Family Dollar. S&P Capital IQ analyst Ephraim Levy said Tuesday's revised offer leaves room for both a counter offer from Dollar Tree, or a negotiated deal at a higher price with Dollar General.

-- Written by Antoine Gara in New York

Follow @AntoineGara

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