On August 21st, Family Dollar Stores (NYSE:FDO) announced its rejection of Dollar General's (NYSE:DG) $78.50 per share all-cash offer for the company made on August 18th. Family Dollar stores reaffirmed its commitment to continue with its merger agreement with Dollar Tree (NASDAQ:DLTR) as part of the July 28th $74.50 per share cash and stock offer for Family Dollar Stores. After Family Dollar Stores' announcement of its rejection of Dollar General's offer, Dollar General issued a press release outlining its continued commitment to make a deal with Family Dollar Stores and the company's belief in its superior offer. Family Dollar Stores cited antitrust issues as central to the company's concern and rejection of Dollar General's offer. However, in the company's offer, Dollar General outlined a number of steps to be taken to alleviate antitrust concerns. This news of Family Dollar Stores' rejection of Dollar General comes as a bit of a surprise as Dollar General's bid was superior in both amount and composition to Dollar Tree's bid, however pursuant to Family Dollar Stores' executives' and board of directors' fiduciary duties, the risk of closing a particular deal must also be considered when evaluating potential strategic transactions.
There are a number of possible developments with the potential merger between Dollar Tree and Family Dollar Stores or between that of Dollar General and Family Dollar Stores. Given the recent developments including Family Dollar Stores' rejection of Dollar General's bid, the most likely outcome is that Dollar Tree's bid is finally accepted despite Dollar General's higher bid. Family Dollar Stores may also ask Dollar Tree to raise its bid to continue with the merger. Alternatively, Dollar General could raise its bid for Family Dollar Stores for further consideration by an amount that would offset the risk of antitrust action. Since the two bids are priced relatively closely, this rejection may be a silent indication of Family Dollar Stores' desire for a higher bid from Dollar General given the antitrust concerns. As a merger with Dollar General would produce roughly double the amount of synergies of a merger with Dollar Tree, Family Dollar Stores knows that Dollar General would benefit handsomely from a merger with the company and could assume that Dollar General would be willing to pay more to acquire the company and achieve these synergies. While the chase for Family Dollar Stores remains complex, it seems the most likely final outcome is a merger between Dollar Tree and Family Dollar Stores given the latter company's preference for the former company's bid.
On August 18th, I published an article titled, "Dollar General: All-Cash Bid For Family Dollar Highlights Significant Synergies" which outlined the benefits that Dollar General would achieve through significant synergies from a merger with Family Dollar Stores. Now with the lessened likelihood of such a merger, the bull case for Dollar General becomes clouded. Obviously, there will likely be further developments regarding Dollar General and Dollar Tree's respective bids for Family Dollar Stores and this could have a large impact on trading in these companies' shares. While it remains possible that Dollar General could raise its offer for Family Dollar Stores, this seems unlikely at this point. It will be important to watch developments with these three companies; however, given recent developments it seems most likely that Dollar Tree and Family Dollar Stores will continue with their merger, potentially for a higher price.
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