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Summary

  • Dollar General has entered the bidding war for Family Dollar, as I predicted a few weeks ago, offering $9 billion to buy its rival.
  • The deal is considerably higher than Dollar Tree’s offer of $8.5 billion, indicating that Dollar General sees more benefit to an acquisition of Family Dollar than Dollar Tree does.
  • As I wrote previously, a Dollar General-Family Dollar merger makes sense, and the higher bid offer from Dollar General confirms that, but wait and buy once the momentum settles.

Dollar General (DG) offered roughly $9 billion in cash, or $78.50 per share, to buy Family Dollar (FDO), topping rival Dollar Tree (DLTR)'s bid of $8.5 billion or $74.50 per share. The deal, which was announced Monday morning, sent stock soaring. Dollar General was up over 11% at midday to $64 and Family Dollar was up 5% to roughly $80 per share. The market was much less encouraged over Dollar Tree. The company's stock had slipped more than 2% at midday

Two weeks ago, I wrote an article saying that it wasn't too late for investors to open positions in Family Dollar and Dollar General, predicting that Dollar General would throw its proverbial hat in the ring (Read the article here). I explained, "Dollar General would face significant hurdles in issuing a counterbid to Dollar Tree's offer for Family Dollar, but it isn't impossible. Family Dollar would be a more synergetic fit for Dollar General, and those synergies add value to the deal. Even if Dollar General does not ultimately succeed, its efforts could push Family Dollar's price much higher. It's not too late to buy in."

I still believe that is the case - there is no set deal and a bidding war could drive the price of Family Dollar even higher. The company in question provides a range of synergies for Dollar General, including economies of scale and broader scope, but Dollar Tree could be looking to move away from its "Everything's $1" motto and develop a full counterpart to the Dollar General discount retail model.

A bidding war over Family Dollar is very likely but there will be a fair bit of movement before the dust settles completely on this, so expect some volatility. Investors would be wise to wait until the momentum cools before opening a position.

Source: Update: Dollar General Makes Bid For Family Dollar