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