Dollar General Corp. trumped a rival's bid for Family Dollar Stores Inc., offering $8.9 billion in cash for the discount retailer as industry leaders scramble to gain an edge in attracting customers who are still struggling financially.
The offer Monday of $78.50 a share from the Goodlettsville, Tenn., company could spark a bidding war as Wall Street pushed Family Dollar's shares to $79.81. The new bid beat a deal reached last month with Dollar Tree Inc. of Chesapeake, Va.
Many analysts expect Dollar Tree to sweeten its $8.5-billion deal for Family Dollar, possibly matching its competitor's price.
"Let the games begin," said Joan Storms, retail analyst at Wedbush Securities. "Both companies could clearly go higher."
The battle over Family Dollar comes as the discount industry grapples with a customer base that has not benefited from the economic recovery. Wal-Mart Stores Inc., which caters to a similar lower-income shopper, dropped its full-year profit forecast just last week after reporting another quarter of disappointing sales.
"The outlook for the sector is perhaps not as robust as it has been in the past," said Peter Keith, senior research analyst at Piper Jaffray. "A sizable acquisition would be a nice way to drive margins and earnings higher."
As it was, Dollar General, the nation's largest deep discounter, was looking at the prospect of No. 2 Family Dollar and No. 3 Dollar Tree combining to overtake its share of the market.
Family Dollar has struggled against rival chains. The Matthews, N.C., company said in April that it was closing 370 underperforming stores after its profit plummeted 35% in its fiscal second quarter, ended March 1. Its profit fell an additional 33% for its fiscal third quarter, ended May 31.
Activist shareholder Carl Icahn, who controls nearly 10% of Family Dollar, has pressured the company for months to put itself up for sale. Icahn said he was "extremely pleased" with the Dollar Tree offer, but said there were other potential buyers that could emerge to woo the company.
A deal with Dollar General would create a business with sales of more than $28 billion, nearly 20,000 stores and more than 160,000 employees across the country. The company said it would be the biggest small-box discount retailer in the U.S.
In a letter to Family Dollar's board, Dollar General Chief Executive Rick Dreiling said he was "surprised and disappointed" about the deal announced last month with Dollar Tree.
"Our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium," Dreiling wrote.
Dollar General has indicated it is serious about elbowing aside Dollar Tree to win Family Dollar. Dreiling, who was expected to retire next year, vowed to remain at the helm through May 2016 to oversee the combination of the two businesses.
And the company also would pay the $305-million breakup fee to Dollar Tree to terminate the existing agreement and assume $700 million in debt. To alleviate potential antitrust issues, Dollar General said it would to unload as many as 700 stores.
A marriage with Dollar General makes more strategic sense for Family Dollar than joining forces with Dollar Tree, analysts said.
Both chains target shoppers in urban and rural markets with food and daily necessities at a variety of price points. Dollar Tree, on the other hand, is located primarily in suburban neighborhoods with goods all priced at $1 or less.
Dollar General said buying Family Dollar could eventually save the company up to $600 million a year after streamlining such operations as distribution and purchasing. Dollar Tree had forecasted $300 million in annual savings.
Industry watchers said that the winning offer could come in at $80 a share or more.
Dollar Tree is "in the mix," Storms said. "They want to do this. There is the potential they would up the bid in order to keep it."
But several observers predicted that Dollar General will ultimately come out the victor because it could save more in expenses with Family Dollar.
"The smartest thing would be for Dollar Tree to take the breakup fee and go on its way," analyst Keith said. "But the way the market seems to be behaving, it's speculating that Dollar Tree is going to come back with a counter bid."
The two suitors are likely to have different plans for Family Dollar.
Dollar Tree said it would keep the Family Dollar brand and maintain many jobs at the Matthews headquarters. Howard Levine, Family Dollar's chief executive and son of company founder Leon Levine, also would remain on the job for at least two years.
Dollar General made no such promises.
Levine has "an emotional attachment to the name, and he would like to keep all his employees employed," Keith said. "But the bottom line is, this will be a board decision."