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Summary

  • Family Dollar rejected Dollar General’s bid looking for a faster close with Dollar Tree.
  • We still have a long-term bullish thesis on Dollar General and believe they are better off without Family Dollar.
  • While we didn’t expect Dollar General’s deal to get rejected (it’s over 5% higher than Dollar Tree’s) we were aware of the regulatory concerns.

In the latest dollar store M&A saga, Dollar General (NYSE:DG) had its bid for Family Dollar (NYSE:FDO) rejected. Family Dollar rejected the deal on the premise of regulatory concerns. The concerns are viable. Together, Dollar General and Family Dollar would own over 50% of the dollar store market. Interesting turn of events, as we believe that a Dollar General-Family Dollar pairing represents the latter company's best chance for growth.

It's hard to see how a Dollar Tree (NASDAQ:DLTR)-Family Dollar combo can meaningfully compete with Dollar General. But we believe that Family Dollar is looking to take the sure bet deal. What's more is that the Dollar General offer is a full 5% higher than the offer by rival Dollar Tree. Granted Dollar General's deal is all cash, versus Dollar Tree's cash and stock deal. Even still, Family Dollar is still trading close to $80/share.

Again, we'd rather see Dollar General not take on Family Dollar's fledgling stores. There's just too much overlap and the investment to re-haul Family Dollar's run down stores would not yield a justifiable return. We don't think Dollar General's pursuit of Family Dollar has as much to do with synergies as it does with keeping Dollar Tree at bay.

Source: Update: Dollar General's Bid For Family Dollar Rejected