On August 18th, Dollar General (NYSE:DG) announced its offer to buy the entirety of Family Dollar Stores (NYSE:FDO) for $78.50 per share in an all-cash deal valued at $9.7 Billion. This offer exceeds the July 28th $74.50 per share cash and stock proposal made by Dollar Tree (NASDAQ:DLTR) for Family Dollar Stores. In recent trading sessions, shares of Family Dollar Stores have traded above the offer price from Dollar Tree in hopes of the company receiving a superior offer. While the potential for further escalation of a bidding war remains, if Dollar General ends up completing its acquisition of Family Dollar Stores, the new company will benefit from greater economies of scale and significant operational and strategic synergies. Additionally, Goldman Sachs and Citigroup Global Markets have agreed to commit financing to complete the transaction. This deal is superior in both amount and structure to the offer that Dollar Tree has made for Family Dollar Stores and while the potential for further bids for the company remains, as it stands Dollar General is in a strong position to buy Family Dollar Stores in its entirety.
Synergy Advantage Puts Dollar General In the Driver's Seat
One of the more significant aspects of Dollar General's bid for Family Dollar Stores is the immense synergies that the merged company has the potential to produce. In this morning's press release, Dollar General noted the following expectations for synergies upon completion of its acquisition of Family Dollar Stores:
"The proposed transaction would be expected to generate significant synergies of $550 million to $600 million on an annual run-rate three years post-closing. Dollar General has developed extensive integration plans across work streams. The expected synergies would be derived from sales growth driven by an improved merchandise offering and store presentation, purchasing and sourcing efficiencies, distribution and transportation optimization and administrative savings."-Dollar General Press Release
The potential to produce $600 Million in synergies annually for three years would significantly add to bottom line growth in the merged company and Dollar General shareholders should welcome such a transaction. Conversely, Dollar Tree noted released the following information about potential synergies in its July 28th press release:
"Dollar Tree anticipates that the transaction will result in an estimated $300 million of annual run-rate synergies to be fully realized by the end of the third year post-closing."-Dollar Tree Press Release
The potential for a merger Dollar General/Family Dollar Stores to produce twice the amount of synergies from a Dollar Tree/Family Dollar Stores company is important as the limited synergies in the potential latter merged company should limit Dollar Tree in its bid efforts for Family Dollar Stores simply given the smaller synergies it could produce. Of course, the synergy numbers provided by Dollar General and Dollar Tree are subject to a number of factors and the actual achieved synergies may differ from the predicted values. Both potential acquirers have the incentive to attempt to make the acquisition for the least possible price and a negotiation strategy could include low-balling the synergy value in order to prevent the acquiree from asking for a higher price. Nevertheless, a merged Dollar General/Family Dollar Stores would have the ability to produce a large amount of synergies through a number of avenues. Additionally, Dollar General added its expectations for the strong earnings accretion expected from synergies as part of the transaction:
"The proposed transaction would be low double-digit accretive on a percentage basis to earnings in the first full year excluding implementation and transaction costs."-Dollar General Press Release
While Further Bids May Be Necessary, Dollar General Should Be Right Partner For Family Dollar Stores
Family Dollar Stores' management and shareholders should welcome Dollar General's superior bid that includes committed financing. Shareholders of Dollar General should appreciate the large synergy potential and earnings accretion that the transaction is expected to deliver. As part of the press release announcing the company's offer, Dollar General included the letter that was sent from its Chairman and CEO, Rick Dreiling to Family Dollar Stores' Chairman and CEO Howard R. Levine, which highlights Dollar General's eagerness to proceed with the acquisition. Dollar General has committed to sell up to 700 stores to settle anti-trust issues and to fund a $305 Million break-up fee to Dollar Tree should it become due. While this $78.50 all-cash offer from Dollar General to buy Family Dollar Stores may not be enough to win board and shareholder approval at the acquiree company, even if the price is a few percentage points higher, Dollar General should be the right partner for Family Dollar Stores to pursue a deal with.
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