Dollar General's (DG) Acquisition Proposal of Family Dollar (Transcript)

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Dollar General Corporation (NYSE:DG)

Acquisition Proposal of Family Dollar

August 18, 2014 08:00 AM ET

Executives

Mary Winn Pilkington - VP, IR

Rick Dreiling - Chairman and CEO

David Tehle - CFO

Analysts

Dan Binder - Jefferies

Charles Grom - Sterne Agee

Paul Trussell - Deutsche Bank

Vincent Sinisi - Morgan Stanley

Matthew Boss - JP Morgan

Anthony Chukumba - BB&T Capital Markets

Scot Ciccarelli - RBC Capital Markets

Scott Mushkin - Wolfe Research

Stephen Grambling - Goldman Sachs

Joe Feldman - Telsey Advisor Group

Stacie Rabinowitz - Consumer Edge Research

Patrick McKeever - MKM Partners

Meredith Adler - Barclays

Wayne Hood - BMO Capital

Operator

Good morning. My name is Evelyn and I will be your conference operator today. At this time I would like to welcome everyone to the Dollar General Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions). I would now like to turn conference over to Mary Winn Pilkington. Please go ahead ma’am.

Mary Winn Pilkington

Thank you, Evelyn. Good morning everyone. Thank you for joining us today. This morning we issued a press release announcing our proposal to acquire Family Dollar. Our press release includes a copy of the letter we sent this morning to the Board of Directors of Family Dollar. The press release and the slides referenced in this call are available in the Investor Relations section of our web site located at dollaregeneral.com, under Conference Calls and Investor Events.

If you are listening on the phone and want to follow along with us on slides on our Web site please make sure to click the nearest icon on the lower right section of your screen and click live phone to optimize synchronization. Presenting on our call today are Rick Dreiling, Chairman and CEO and David Tehle, our CFO. Our call is scheduled for 45 minutes. We will have a Q&A session after our prepared remarks. Before, we begin our prepared remarks, I would like to refer you to Slide 2 that includes our forward-looking statement disclaimer and to Slide 13 that includes our non-GAAP disclaimer.

Today’s call may contain certain forward looking statements including but not limited to statements regarding the plan, intention and expectations pertaining to Dollar General’s proposal to acquire Family Dollar. The financing of a potential loan and the anticipated results benefit synergies, earnings, accretion cost, timing and other expectations related to the potential transaction. These forward looking statements are subject to many risks, uncertainties and other factors that may cause actual results to differ materially from those projected in such forward looking statement.

All forward looking statements on today’s call should be evaluated in the context of those risks, uncertainties and other factors including those described under Risk Factors in our most recent Annual Report on Form 10-K and subsequent quarterly filings on Form 10-Q with the Securities and Exchange Commission. Dollar General undertakes no obligation to update or revise any forward looking statement whether as a result of new information, future events or otherwise. In addition, we will discuss certain information that has not been calculated in accordance with U.S. Generally Accepted Accounting Principles or GAAP. Reconciliation of non-GAAP information to the most directly comparable measures calculated in accordance with GAAP are provided on Slide 14 and 15.

With that I would now like to turn the call over to Rick.

Rick Dreiling

Thanks, Mary Winn. Good morning and thank you all for joining us today on such short notice. As you all know, this morning we announced a proposal to acquire all outstanding shares of Family Dollar for $78.50 per share in a transaction valued at $9.7 billion. For Family Dollar shareholders, our proposal provides a premium valuation over the current transaction agreement with Dollar Tree. Coupled with the certainty of an all cash transaction, we believe our proposal is far superior for Family Dollar shareholders. For Dollar General Shareholders, the proposed transaction is a significant strategic opportunity to create immediate and long lasting shareholder value.

I want to start by touching on some of the highlights of this proposed transaction. We will address each of these points in greater detail as we move through the presentation. This combination will solidify Dollar General’s position as the leading small box discount retailer, allowing us to deliver convenience and everyday low prices to customers to nearly 20,000 stores in 46 days with sales exceeding $28 billion and over 160,000 employees. Based on our strong track record of success in improving our own profitability since 2008, we believe we can manage the Family Dollar stores more efficiently and effectively.

Additionally, although we have highly complementary business models, we believe that further refinement of the combined product offerings will add value for our customers, providing them with convenience in everyday low prices on household basics and necessities along with the compelling assortment of non-consumable merchandise.

We have done extensive analysis of potential synergies between the two companies across merchandising, store operations, supply chain and administrative functions. As a result of that work, we have a comprehensive and thoughtful action plan ready to put in place to capture the synergies available in this potential transaction. Of course to execute the integration of this magnitude you need the right management team. As many of you know I announced my retirement several weeks ago. However, I am very excited about potential here and if the merger agreement is reached I will stay at Dollar General as CEO income the combined Company through May of 2016. I will work quickly to build the right leadership team to successfully implement our transition plan as well as lead this tremendous retailer going forward.

Lastly earnings accretion, we believe that this proposed combination would be very well positioned for long-term revenue and earnings growth given the anticipated $550 million to $600 million of annual run rate synergies over three years.

We expect the transaction will be immediately accretive to earnings excluding implementation and transaction costs.

Moving to Slide 4 let me share with you some of the financial highlights of this proposed transaction. This is a compelling valuation to Family Dollar shareholders and represents 11.6 times trailing adjusted EBITDA. The price represents a 29.4% premium to the Family Dollar share price at $60.66 on July 25, the last trading day prior to the Dollar Tree announcement.

Importantly, our proposal is not subject to any financing conditions, Goldman Sachs and Citi have agreed to provide immediate financing for all the financing necessary to consummate the transaction. The commitment amount includes all fees and expenses including the $305 million termination fee to Dollar Tree. We believe that Family Dollar Board and management team will recognize the financial superiority of our proposal. We look forward to working constructively with them to reach a definitive merger agreement so that we can move forward and realize the benefits of this combination for the shareholders of both companies. We estimate that we can close the proposed combination.

Moving to Slide 5, the financial benefits of the proposed transaction for Family Dollar shareholders are indisputable. Importantly, we have undertaken significant economic and antitrust analysis with respect to the transaction and we’re confident in our ability to effectively address any potential issues.

We’re prepared to divest at the 700 retail stores in order to achieve the requisite antitrust approval. This is approximately the same percentage of the total combined stores represented by the 500 store divestiture commitment in the Dollar Tree agreement.

We’re ready to move immediately to complete the diligence with respect to Family Dollar and to proceed towards definitive merger agreement substantially similar to the agreement between Dollar Tree and Family Dollar modifies necessary to accommodate our cash proposal, antitrust matters and to provide a time period to close the proposed transaction consistent with the existing agreement.

Turning to Slide 6, the proposed combination would clearly solidify our position as the leading small box discount retailer with nearly 20,000 stores in 46 states with revenue of $28 billion.

Slide 7, you can see how highly complementary our two models are. Combined, we would be stronger given the opportunity for significant operational efficiency. We know this business exceptionally well. This transaction would allow us to serve customers of both companies better with greater scale and product selection and a firm commitment to everyday low prices that our customers trust.

Slide 8, provides detailed summary of our expected synergies from the proposed combination. The management team of Dollar General has developed extensive plans to capture the $550 million to $600 million of run rate synergies within three years. While we will begin to receive benefits in the first year the synergies are expected to ramp up consistently across the three years. Approximately 20% of the synergies are expected to come from improved category management and increased sales productivity across both consumables and non-consumable categories. 40% from gross margin expansion from the merchandised procurement and sourcing and the optimization across the supply chain to reduce their miles (Ph). The remaining 40% is from the SG&A cost reductions, including implementation of our roll standard delivery method to the Family Dollar stores.

Our plans are specific they are actionable across every world stream with the business. Estimated integration costs will be in the range of $300 million to $400 million and capital expenditure integration would be about $400 million.

Moving to Slide 9, during my 10-year at Dollar General, I had a great opportunity to read a management team that transforms the company starting in 2008. I am excited and energized about our prospects ahead of us. Our plan is for Todd Vasos, our Chief Operating Officer, to be responsible for the day-to-day integration of Dollar General and Family Dollar.

Todd has been with Dollar General since 2008, when he joined us as our Chief Merchandizing Officer. I met Todd in 2003 when he was the Chief Merchant at Long Drugs. What I admire about Todd is that he has that special combination of being both a merchant and an operator. And as a proven effective leader, who has been a key part to me in the improvements we have made at Dollar General.

I believe that the team, both companies we have the right people and a significant depth to lead the combined company. Over the years, the corporate mission statements of both companies had been very much aligned with a strong commitment to providing our customers with convenience and value.

We look forward to the opportunity that works with the board and management of Family Dollar to bring these two great companies in cultures together.

Now, I’ll turn it over to David to share with us some key financial highlight and discuss finance.

David Tehle

Thank you, Rick and good morning everyone. As Rick covered the highlights to the offer we have made today. Let me share with you more of the detail with proposed terms of the transaction starting on Slide 10. As Rick said, given how complementary our business models are to each other the purposed combination of Dollar General and Family Dollar, we generate significant earnings accretion through operational synergy.

On a combined basis, Dollar General would have pro forma revenue for the last 12 months exceeding $28 billion and EBITDA for the same period of approximately $3.5 billion. The transaction is expected to be low double-digit accretive on a percentage basis through our earnings in the first year excluding implementation and transaction cost.

Slide 11 provides an overview of our anticipated financial structure. We were able to pursue this transaction because of our strong balance sheet and a significant cash generation of the combined business. As we considered our financing alternatives, we chose to utilize a combination of a revolver, term loan and notes.

We believe that the significant cash flow generated by the combined company will enable us to return to investment grade ratios within 3 years from closing. On a pro forma basis the transaction will result in adjusted debt-to-EBITDA approximately 5.5 times based on the most recently reported quarter.

This leverage ratio would improve rapidly as we would utilize the strong cash flow of the combine company to pay down debt. As always, we will be focused on execution and the strong returns that our model generates. I share Rick’s enthusiasm for this transaction as it is financially attractive for Family Dollar shareholders and we believe it’s the right step to drive long-term shareholder value for Dollar General.

Now I’ll turn the call back over to Rick.

Richard Dreiling

Thanks, David. Before closing I want to thank the outstanding employees of Dollar General for the dedication support as we celebrate our 75th Anniversary this year and as hope to move forward with this exciting opportunity. For 75 years, our employees have been the cornerstone of our mission of services others. These are the people who represent us and dedicate themselves to their communities throughout United States.

It is an exciting time for Dollar General. In fact, we are here in Nashville for kicking off our annual field leadership deal with more than 1,200 leaders of the company as we look to celebrate our 75th year of savings in service, because of the dedication and hard work and commitment of our employees we are able to pursue this transaction from a position of strength.

Thank you for your time this morning. We’re prepared to immediately enter in a construct discussion with Family Dollar to sign a definitive merger agreement that provides enhanced value to Family Dollar shareholder and enable us to realize the benefits of this combination.

With that Mary Winn, I’d like to open up the lines up for questions.

Mary Winn

Sure, thanks. Hi, Evelyn, we’ll start with question please.

Question-and-Answer Session

Operator

Okay. Sure. And your first question comes from the line of Dan Binder, Jefferies.

Dan Binder - Jefferies

My question for you is regarding the synergies, I think you said 20% will come from sales productivity, I was just curious that looks low to me I am just curious what your underlying assumption is, somebody has talked about sales productivity is that include of getting the FDO stores as productive as yours or at some level of productivity?

Richard Dreiling

Yes. So we’re looking at the sale per square foot Dan in the operating for wall operating profit. Yes, we’re comparing their stores to us and we see significant opportunity in consumables as well as potential and non-consumables overall. And so yes, we have to make assumptions in terms of where we could take their stores vis-à-vis ours and - again these are our best guesses at this point this time and as we do more due diligence that number could potentially change.

Dan Binder - Jefferies

And if I could just squeeze in more regarding you antitrust analysis. Could you elaborate a little bit in terms of where you thought potential issues would be and why 700 is the right number?

Rick Dreiling

Yes, we have actually, Dan, spent a couple of weeks working with this, with an outside law firm and an economist and I asked if they a lot of horsepower has been applied to get this and right now we feel 700 is the right number and we are very comfortable with that.

Operator

(Operator Instructions). Your next question comes from the line of Charles Grom, Sterne Agee.

Charles Grom - Sterne Agee

I guess, Rick in your view, when you take a look at Family Dollar and I know you have studied hard over the years. Why do you think they like so much in sales productivity, has it been real estate pricing, execution, some combination of above. Could you just kind of flush that out for us? Thanks.

Rick Dreiling

I think as we look at this, we have a track record that has delivered results and is all built around category management. And our philosophy on category management, Chuck, is not only the right items to carry but having them priced right and just as importantly having them, the categories in the proper position in relation to each other in the store which makes the store much more shopable (Ph) for the consumer. And not to be flip it here, it’s really a combination of a lot of little things that all add up at the end of the day to one big thing.

Charles Grom - Sterne Agee

Okay, great and then just a follow-up, I mean hypothetically if you were not to consummate your transaction, would you still look to retire next May?

Rick Dreiling

Yes, I mean Michael right now is to retire in May of 2016; I have up for another year. I think that gives us plenty of time to consolidate and get the ball rolling here. And the important thing for me here is the team around me. There is a lot of debt as you know in this company. We believe there is a lot of talented individuals in Family Dollar and we are going to be able to put together a solid team.

Mary Winn Pilkington

Evelyn, we will move onto the next question please.

Operator

Your next question comes from the line of Paul Trussell, Deutsche Bank.

Paul Trussell - Deutsche Bank

Just a question on the timing of the deal and that you outlined $550 million or $600 million of synergies is very attractive. Just wondering why, you did not move on this deal earlier if it was that attractive all along? And just start with that question if you don’t mind.

Rick Dreiling

Paul, I will be honest with you we have an interest in the combination with Family Dollar multiple times over the last few years. Suffice it to say for someone who was supposedly involved in a process, we were very surprised by Family Dollar’s announcement with Dollar Tree. Now, you are even one step further at why I thought this asset was into play, I probably wouldn’t have announced my retirement. Having said all of that, its water under bridge and what we are here to do right now is get our merger agreement with Family Dollar as we believe we have superior proposal for shareholder.

Paul Trussell - Deutsche Bank

Fair enough and then as we look forward, you outlined low double-digit accretion to earnings in the first year. Can you just walk through the time table of the synergies and how you think they would flow year one versus year two and three? What are some of the initial items that you would expect to benefit from immediately?

Rick Dreiling

It’s actually spread pretty evenly among the three years as you get up to the $550 million or the $600 million, you can pretty much divide by three and if it were 600, you get almost 200 a year and again it comes from all the areas that we discuss. It’s not one particular area. There are things in SG&A. There are things in margins and there are things in sales and of course the resulting margin that comes from that sale. So, the good news is it’s not counting on one particular item. There are whole variety of items and it’s pretty even among the three years.

Paul Trussell - Deutsche Bank

And lastly and quickly, just the banner itself Family Dollar, how do we think about you operating that business going forward and the ability of you guys turning Family Dollar banners into DG? What’s the thought process around that?

Rick Dreiling

Paul, it’s little soon for all of that right now, I mean our intent is we are more focused on the inside of the box as opposed to what the sign is on the outside. And going forward, when this deal gets done, the Family Dollar will look exactly like the Dollar General on the inside.

Mary Winn Pilkington

All right. Moving on Evelyn.

Operator

Your next question comes from the line of Vincent Sinisi, Morgan Stanley.

Vincent Sinisi - Morgan Stanley

I wanted to ask about the 700 stores that you said you would be committed to divesting to go and through all approvals. Just wondering Rick if you can give any further commentary on versus the stores that Family Dollar has identified and where those additional may or may not be coming from the fair amount of due diligence, get on that or if it’s more just really for the regulatory purposes?

Rick Dreiling

Yes, I mean we have done a lot of work on the regulatory side. To be honest with you I have not actually looked at where all the stores are, going to be additional 200 stores, we’re continuing to work on that and we feel very comfortable with that number at this stage of the game.

Vincent Sinisi - Morgan Stanley

And then just following up quickly if I can, the current initiatives at Family Dollar in terms of pricing structure certainly you did the stores as well. Just any basic thoughts on that as compared to what you may have in mind down the road? Should this go through?

Rick Dreiling

Yes, I mean we think that we’re going to be able to give the Family Dollar customer a much better offering, based on our ability with category management which I think in all honesty and consumable retailing, very, very strong and it allows a significant scale in order to get a better cost of goods and be able to pass that on to consumers.

Operator

Your next question comes from the line of Matthew Boss, JP Morgan.

Matthew Boss - JP Morgan

As you think beyond the outline cost synergies that you have given this morning. Where do you see operationally the lowest hanging fruit? And just kind of elaborate on some of your excitement around the operational opportunity with Family Dollar.

Rick Dreiling

I have to say the work we have done on supply chain in Dollar General, I think is has just been exceptional. The exciting thing about this combination is their distribution system is totally complementary to ours. We actually believe that we can go perhaps two, three years without having to build an incremental DC as they have more than enough capacity. And what will happen for us with the incremental DCs we’ll be able to lower our stem miles significantly, which will all translate into immediate savings.

Matthew Boss - JP Morgan

And then from a management perspective on a go forward basis, what would Howard Levine’s role or other senior management at Family Dollar be?

Rick Dreiling

Matt it’s a little soon for all of that right now. Our major emphasis right now is getting that merger agreement put to bed because of the size, the superiority of our proposals.

Operator

Thank you. And our next question comes from the line of Anthony Chukumba, BB&T Capital Markets.

Anthony Chukumba - BB&T Capital Markets

Just had a somewhat related question just in terms of management. So you mentioned that Todd through the extent that this deal goes through Todd Vasos would lead the integration process. Is it safe to assume that he would be the front runner to replace you Rick when you do retire in May 2016?

Rick Dreiling

I am a huge supporter of Todd and we’ll let that play out over the course of the next couple of years.

Operator

Your next question comes from the line of Scot Ciccarelli, RBC Capital Markets.

Scot Ciccarelli - RBC Capital Markets

Rick can you outline how different you think your customer base is from that of the typical Family Dollar store. And if you were to put a DG type merchandising box into their locations, how do you think that plays out over time?

Rick Dreiling

It’s a great question. I think the customer bases are incredibly complementary. I think the difference between the two chains is that we have a tremendous amount of strength in rural community and we have things to learn in metro and Family Dollar is just the reverse. There are good operation in the metro and have opportunities in rural. So we actually think about the two combinations, we have to learn something from each other.

Scot Ciccarelli - RBC Capital Markets

And then did you guys mention or I may have missed it the expected blended interest costs for the financing?

Rick Dreiling

No it’s a little bit early to be talking about interest cost. I will say that right now our thought process on the financing is that we would get a secured term loan probably 70 years, senior notes probably eight years and then five year ADL in place, heavy emphasis on that term loan in terms of where the financing comes from, but the ADL would be relatively large also.

Operator

And your next question comes from the line of Todd [indiscernible] of Wells Fargo.

Unidentified Analyst

Quick question for you on the deleveraging path that you’re expecting, I think you mentioned in the slides being able to get back to investment grade credit metrics within about three years. So can you kind of walk through how much free cash flow you expect to have per year for deleveraging?

Rick Dreiling

Yes, again we’re not going to get that specific in terms of our model, I will say that between those few businesses and the synergy and the fact the synergies are relatively even among the three years that we should see consistent -- see that ratio come down consistently as you go through the three years, it’s not going to be one big passing in year three, we should make progress every year and our goal would be to pay down debt obviously very different than today. We’re taking our cash and buying stock. We would be taking our cash and paying down debt with it.

Unidentified Analyst

Okay. And can you clarify on page 8 of the slide that you talk about investment of $400 million in capital expenditures, is that a onetime clause and is though, what is that targeted towards?

Rick Dreiling

Yes. That is a onetime clause that capital for integration and it has to do with a whole variety of things. We have different fix bringing our stores what we call the 78 inch profile. We have a little different cooler step up for our perishable, obviously there be some changing of exterior sign. And then the whole easy store process using the rolltainers that litigates with the truck and then paper recycling, probably things like that, as well as some system changes it all adds up to around $400 million.

Operator

And our next question comes from the line of Scott Mushkin, Wolfe Research.

Scott Mushkin - Wolfe Research

So, we’ve done some analysis on Family Dollar that suggests your SG&A per stores, actually quite a bit higher than your Rick, I was wondering, the only thing part of it is lease expensed but I was wondering if we get your thought on that and is that a big opportunity as you see going forward to try to get those expenses down?

Rick Dreiling

Yes. I think the biggest opportunity we see and that labor for is we have a very robust labor model, a labor management model that allow us to get the right number of people in the store based on the workflow and flow of customers in and out of store. And I can get one of the big opportunities we have with them.

Scott Mushkin - Wolfe Research

Okay. And if I could just follow-up, it seems to me that, no, there may be antitrust was a little bit, I know we talked about this a couple of times a little bit of concern, could you talk about where those concerns lie to enter this royal markets for maybe, Family Dollars have tremendous presence but if they are there, you’re there or what was driving the antitrust concerns given, there’s usually a Wal-Mart super center was about five miles almost the matters of what?

Rick Dreiling

Yes. I personally, I’m going to say, we don’t believe the antitrust is a matter of concern, we think it’s very manageable and also got the stores tend to be spread across many, many geographic regions, it’s not like it one specific area. And as you could imagine the issues is probably going to be in a small role community whether there is only a Family Dollar and a Dollar General. But again, we do not believe the antitrust issues are instrumental at all.

Scott Mushkin - Wolfe Research

And then just one last quick one, how quickly do you think you can close this if you and Family Dollar start to negotiate right away is it a nine month close, it’s going to take a year, what kind of, what timeframe you guys have?

Rick Dreiling

Well, it all depends on the FCC right, I mean that’s something we can’t predict, I mean we’re preparing immediately to, just to take action in term of the due diligence and get an agreement signed as quick as possible and then really it’s going to be in the hand for the government in terms of the FCC reveal.

David Tehle

We anticipate the same timeframe the trading, Family Dollar going through.

Mary Winn Pilkington

Okay. Evelyn, we’ll go into the next question.

Operator

Sure. The next question comes from the line of Stephen Grambling, Goldman Sachs.

Stephen Grambling - Goldman Sachs

You mentioned the capacity available from taking on at the ODC, so how does the transaction change process on the organic growth opportunities going forward. And does this change the opening plans currently in place?

Rick Dreiling

You got (ph) our opening plans for new stores?

Stephen Grambling - Goldman Sachs

Correct.

Rick Dreiling

Yes. I think, I have, our pipeline for 2015 is already predominately full, I am sure you’ll see the exact same thing on the Family Dollar side but it would be our intent to slow that growth down and focus on the integration, we’ve done a very good job as Dollar General have not swallowing too much at any one time. And then over the course of a couple of years, it begin to accelerate that growth back up and we anticipate the thing work from 4% to 6% growth on the combine company.

Operator

And you next question comes from the line of Joe Feldman, Telsey Advisor Group.

Joe Feldman - Telsey Advisor Group

I guess, I want to go back with Stephen’s question, first I guess, I was curious, so you’re saying 4% to 6% combine growth, if this were to happen?

Rick Dreiling

Yes. We believe that over the course of the couple of three years it takes to integrate the company as we gain to ramp back up, we’re looking at store growth in the neighborhood of 4% to 6%, now remember that’s on a combined energy over 20% stores that’s quite a few doors that we’re going to be opening, in addition to normal remodels and reload.

Joe Feldman - Telsey Advisor Group

Got it. And then, a number store related question, I know with people you’re asking about the antitrust issues and I guess, all to my correct or two, how is, I know how you said 700 stores the same ratio is what was proposed in the other deal, but -- I don’t know just often you see 19,000 stores combined many of us had done a lot of store visits and you are driving down the street and you see you guys are right next to the Family Dollar. I mean do you think there is more opportunity for closures, would you want to close more stores or do you think you are just running these two separate brands?

Rick Dreiling

So, here how I am looking at it, Joe, first of all it’s not just Family Dollar and Dollar General, it’s the world of consumable retail and when you think about the world of consumable retail and which we have talked about quite frankly for a long time, is anybody who sells what you sell, that’s the pie. And if you look at it that way that pie is much long or larger rather. Now I will tell you as we get into this after this is put together there will probably be sports where the stores are across the street from each other where we would make the decision to consolidate in one larger volume operation but again the FTC wouldn’t make that decision, we will make it. And I was talking to an attorney the other day that actually told me you have to take Amazon into this world of consumable retailing right now. So, we are pretty comfortable.

Joe Feldman - Telsey Advisor Group

Got it and then back to without revealing too much I guess it’s about negotiation but where are you in it? I mean the letter that you sent or presented to all of us today was dated as of today. I guess have you had many discussions with Howard directly about this kind of deal and I know we are all excited about it in our financial community. But how close are you to potentially consummating something like this and presumably you are willing to fight this out for a little while if Dollar Tree were to come back with counter offer?

Rick Dreiling

Joe, we have expressed interest in our combination with Family Dollar multiple times over the last few years. I said it a couple of times for someone who is supposedly involved in a process there was no one more surprised than us when Family Dollar announced their agreement with Dollar Tree. So, we feel that we have an offer that is far superior and we are ready to go. We want a merger agreement.

Operator

Thank you. Our next question comes from the line Stacie Rabinowitz, Consumer Edge Research.

Stacie Rabinowitz - Consumer Edge Research

I was just wondering about thoughts on private label and integration of the private label offering between the two teams?

Rick Dreiling

We have done a tremendous amount of work on private brands and if you look at our penetration versus the penetration of Family Dollar, it was significantly different, so that is not only a sales opportunity, it brings margin opportunity. And our intent would be we will roll our private brand Clover Valley into Family Dollar as the merger is put together and of course then you are going to have many synergies with the manufacturing community in terms of incremental volume and the fact that you only need one design label.

Operator

And your next question comes from the line of Patrick McKeever, MKM Partners.

Patrick McKeever - MKM Partners

Just a couple of questions, the first one is, Rick you said you have shown interest on multiple occasions over the past two or three years selling Family Dollar. So I guess my question is what were some of the holdbacks perhaps to moving more quickly or more aggressively? And then my second question is on Wal-Mart and Wal-Mart’s small format store push here, getting more aggressive with neighborhood markets and Wal-Mart expressed orders. The concerns about what Wal-Mart is doing with small format play into your decision and just broadly, could you just talk about how you view Wal-Mart’s small format agenda?

Rick Dreiling

I think let’s take a last question first, as we reflect on what Wal-Mart is doing, I think when they talk about small store, where they are really excited is the neighborhood market and that’s the store that’s anywhere from 45,000 to 60,000 square feet. So, it’s basically a smaller grocery store. I know they are working on an express type format, I will tell you they have opened up several of them against us and honestly the hit we have taken on [the nose] so far has actually been less than what happened when Family Dollar opens up. And after a year where we have taken on that Wal-Mart expressed competition, our stores are cycling positive comp. So, we view it as again just the normal day-to-day operation of competition and we do think a 20,000 store chain which is significantly ahead on the small box deals.

In regard to Howard and what’s been going on there in Family Dollar, I think cultural issues or the social issues are much different with the Dollar Tree situation than they are for us. I mean there is a commitment to a banner, there is a commitment to being CEO and a commitment to have presence in Charlotte. And we are not in the position yet to really standup to talk about all that. So again we’re here, what’s important is all in the bridge and we’re ready to move forward.

Operator

Your next question comes from the line of Meredith Adler, Barclays.

Meredith Adler - Barclays

I unfortunately got on the call very late, so I may have missed some of this. But you just said and I wanted to confirm you said that you haven’t made any decision about the banners for the brands or would it make sense to move to just one banner?

Rick Dreiling

Yes, what we’ve said is right now it’s early in the process. Meredith we have a lot of thoughts and lot of ideas and we want a chance to sit down and get the merger agreements together and spend some time with the folks in Charlotte, then we’ll go from there.

Meredith Adler - Barclays

And I guess because I have been around a long time I tend to see the downside of things. I am just wondering, I have a lot of respect for you guys. When you think about the risks of integrating these companies. Well first I’ll say do you perceive that there are some risks? And you’re probably not going to tell us what areas but is part of your planning process to include mitigation for any of those risks for being prepared for where there could be problems. Because we both know mergers work better on paper.

Rick Dreiling

That’s absolutely fair, here is the difference with this merger as I reflect on this. Usually Meredith you hear mergers announced and the line is one plus one will equal three. This is not one of those occasions. This is one plus one is going to equal two. And the reason is going to equal to is we have the playbook, we have the management team and we have demonstrated the results. What we’re bringing to the table for all of the employees and shareholders at Family Dollar, we know this business and we’ve demonstrated it.

And we’re confident this is a matter of doing what we’ve already been doing since 2008.

Mary Winn Pilkington

We have time for one more call.

Operator

So your final question comes from the line of Wayne Hood, BMO Capital.

Wayne Hood - BMO Capital

Rick I was just curious, I mean I think we’ve all done math and we suggest that you could actually or have the ability to up your bid price. And I was just wondering if Dollar Tree where to come back or somewhat to come back in and offer a competing bid. What amount of leverage would you be willing to accept on your balance sheet to stay competitively in the offering?

Rick Dreiling

I’d say what Wayne, right now I think we’ve got an exceptional offer on the table and let that play out first.

Wayne Hood - BMO Capital

But there is room from this what you described or you haven’t done the due diligence the way others might have done, is that a fair way to think of it?

Rick Dreiling

Yes, I’d say we got a great deal on the table, let’s let it all play out.

Wayne Hood - BMO Capital

I was also curious if the regulators come back and say that you to close fewer stores for monopolist reasons. Are there terms in the agreement where it could be changed if they say you can’t close 700, if can only be 200 because the market becomes monopolistic?

David Tehle

Well I think actually that would be better for us if only had to close 200 and we’d like to keep as many stores open as possible under the Dollar General banner. So I don’t think that would be an issue at all.

Wayne Hood - BMO Capital

And the non-productive stores?

David Tehle

Well I addressed that issue, what you could do is consolidate stores, two stores into one.

Wayne Hood - BMO Capital

And then finally have you gotten any indication of any cost that you could take out within the McLane agreement at all if there is an opportunity?

Rick Dreiling

Yes, I mean again it’s little early for that, that’s exactly one of the areas that we would be focusing on. That’s a perfect example of what this is all about.

Mary Winn Pilkington

Thank you everyone for joining us today and Richard and I are available for any questions if you need anything. Please feel free to reach out to me and thank you very much.

Operator

Thank you. This concludes today’s conference call. You may now disconnect.

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