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[10 comments]

Dollar General makes rival bid for Family Dollar

August 18, 2014

Dollar General has offered about $9.7 billion to buy Family Dollar, creating a bidding war by trumping an earlier offer made by Dollar Tree.

Dollar General said Monday that it would pay $78.50 per share in cash, 3 percent higher than Family Dollar's Friday closing price of $76.06.

Last month Dollar Tree made an $8.5 billion bid for Family Dollar. It offered to pay $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each share they own. The companies put the value of the transaction at $74.50 per share.

Rick Dreiling, Dollar General's chairman and CEO, said in a statement: "For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares."

Elaborating on the benefits, Dollar General said the combination would create the "preeminent small-box retailer in the U.S" with nearly 20,000 stores in 46 states. The combined company could produce sales exceeding $28 billion and employ over 160,000 workers.

The Dollar Tree combination promises over 13,000 stores in 48 states as well as five provinces in Canada, with sales over $18 billion and an employee count of 145,000 people.

Dollar General also said the business models and product mixes of Dollar General and Family Dollar are "highly complementary," an implied jab at Dollar Tree, which sells goods at $1 or less.

Dollar General's statement added, "There is opportunity to more efficiently and effectively manage the Family Dollar portfolio of stores given Dollar General's strong track record of success in improving its own profitability since 2008."

Synergies of $550 million to $600 million annually are expected, three years post-closing.

Mr. Dreiling, who has led Dollar General since 2008 and had planned to retire in May 2015, has agreed to remain in the role of chairman and CEO of the combined company until May 2016 if a merger is successful.

Dollar General also believes it "can quickly and effectively address any potential antitrust issues." It is prepared to divest up to 700 stores in order to achieve the approvals, which represents the same percentage that Dollar Tree proposed in its deal to buy Family Dollar.

Activist investor Carl Icahn, which acquired a 9.4 percent stake in Family Dollar in June, has recently been pushing for a merger with Dollar General. Family Dollar had been exploring a sale long before Mr. Icahn's purchase, having first entered talks with Dollar Tree by March. The Dollar Tree agreement includes a $305 million breakup fee.

Discussion Questions:

Would Dollar General make a better fit for Family Dollar than Dollar Tree? What would a Dollar General/Family Dollar combination mean for retail's competitive landscape?

While we value unfettered opinion, we urge you to show respect and courtesy for people or companies about whom you comment. Keep in mind that this is a public, professional business discussion. RetailWire reserves the right to edit or refuse the publication of remarks that we deem unsuitable. We may also correct for unintended spelling and grammatical errors.

Instant Poll:

Which is the best merger partner for Family Dollar from an operational standpoint?

Comments:

So am I suppose to believe that in all those strip shopping centers with both Family Dollar and Dollar General in them, they will keep both stores open? I would predict a lot of store closings and consolidations. Usually I don't see Dollar Tree go into shopping centers with other dollar stores.

David Livingston, Principal, DJL Research

The combination of Family Dollar and Dollar General is potentially a lot more compatible than the Dollar Tree deal. As many have pointed out, Dollar Tree pursues a completely different strategy (everything at $1 or below) so the growing pains involved in an acquisition of Family Dollar could be painful.

But Dollar General's move is complicated, too. First, it is more likely to be scrutinized for antitrust issues. Second, there is some likely real estate overlap that needs to be addressed. Finally, cultural differences are never easy to work out when one rival buys another.

The best recent parallel, on the last point, was the Macy's acquisition of May Department Stores several years ago. It worked out well over time, but it took years to achieve the kinds of efficiency and synergy that Macy's had in mind.

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Dick Seesel, Principal, Retailing In Focus LLC

A few things on the Dollar General /Family Dollar issue, 1.) antitrust will have some things to say 2.) real estate overlap seems like it is way more than 700 stores if my travel sample is accurate.

Who wins in the bidding war as operations at all three get distracted—Walmart?

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Robert DiPietro, GVP Product Strategy & Business Development, Affinion Group

When forecasting synergy savings, one of the key areas to look at is business models. Dollar General's and Family Dollar's are more alike than are those of Dollar Tree and Family Dollar. This may result in their have to sell or close more locations, but in the long run will produce a higher level of savings.

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Steve Montgomery, President, b2b Solutions, LLC

Oooh, so the savings will go from .0001 per-store per-year with a Dollar Tree merger to a .0002 per-store per-year. Be still my heart.

This race to the bottom is turning into pure madness.

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Paula Rosenblum, Managing Partner, RSR Research

The first thing is to stop calling them "dollar stores." They have really evolved into "neighborhood value stores" competing with food, drug, mass and convenience stores. For the consumers they serve, they are positioned as more convenient than the bigger boxes and less expensive than the convenience stores.

This combination makes more sense from a strategic standpoint. Family Dollar tends to be more urban while Dollar General is more rural. Neither is tied to a price point like Dollar Tree. However, the total number of stores and the overlap in coverage is likely to be excessive and require significant rationalization. Also, the FTC is likely to get involved.

Importantly, both of these retailers have grown via increased store count. The combination will have to depend on organic growth, a much more difficult proposition.

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Raymond D. Jones, Managing Director, Dechert-Hampe & Co.

So Family Dollar becomes the ultimate winner and we see store closings and people without jobs? That does not seem to be the better fit. But the store operations are more compatible. As for Dollar Tree, this could be a win/win for both because of the differing product and pricing models.

I can see some governmental questions before this is resolved. And we all know what can happen when the government gets involved in business.

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Ed Rosenbaum, CEO, The Customer Service Rainmaker, Rainmaker Solutions

Although the great majority of Dollar Tree stores are one dollar only, for the past ten years they have operated Deal$, a 200 store regional chain that is very similar to the Family Dollar/Dollar General multi price point model so they do have experience and expertise in this segment. I have only visited a few—and my views may be colored that they were newer than some very run-down Family Dollar/Dollar General locations—but have been impressed that they may be the superior operator.

Dollar Tree has also been very successful with its private label offerings at the dollar only level so there is great potential at higher price points. They would be a strong competitor to Dollar General so they may be able to make a strong case to the Justice Dept. to block a merger of the other two.

Alan Buchberg, Analyst, Farmhouse Equity Research

In answer to David's question, they'll probably do what Macy's did: one store will remain the women's/children's while the other will become home/men's...or not. Facetious though it might be, my remark does illustrate that there's little obvious distinction among the three other than price, and since DG is closer, it would seem more logical. Of course if one thinks FD is a failing entity, then maybe DT+FD should be evaluated more as a real estate move, and operations are irrelevant...I can't generate much enthusiasm for anything Carl Icahn blesses.

'notcom'

Why is there so much FTC involvement speculated? The dollar store space, as Mr. Jones at Dechert-Hampe noted, shouldn't be called "dollar stores."

DG and FDO both compete with Walmart, drug stores (CVS, WAG, RAD), convenience stores, grocery stores, etc. Amazon was called out specifically for being part of the competitive landscape. I'd like to understand the anti-trust argument here.

'DollarStoreDalai'

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