Update: Family Dollar's Acquisition

Sep. 2.14 | About: Dollar General (DG)

Summary

Dollar General announced that it would be willing to up the ante on its proposed purchase of Family Dollar, offering $80 per share.

This news confirms my opinion that Dollar General realizes that it has more to gain from purchasing the company than Dollar Tree does.

While I could not predict if another buyout offer would, in fact, materialize, I alluded to a high possibility that it could.

Sep. 2 was a big day for investors who own shares in Family Dollar (NYSE:FDO). After news broke that its larger rival, Dollar General (NYSE:DG), offered to buy the discount retailer for $80 per share (or $9.1 billion), 2% above the $78.50 previously offered by the retailer, shares of the takeover target inched up in pre-market trading. Not only does Dollar General's advanced proposal consist of an all-cash payment, it flies in the face of the $8.50 billion bid made by Dollar Tree (NASDAQ:DLTR) to acquire Family Dollar.

Bid History for Family Dollar

Date Action Price Premium over Pre-Offered Price
Jul. 25 Family Dollar Prior to Bid $60.66 0%
Jul. 28 Dollar Tree Bids $74.50 22.8%
Aug. 18 Dollar General Failed Bid $78.50 29.4%
Sep. 2 Dollar General Re-Bid $80.00 31.9%
Click to enlarge

After Dollar General's previous bid, which was around 5% greater than the price Family Dollar agreed to be purchased for by Dollar Tree, the acquiree stated that antitrust issues might jeopardize any sort of deal with Dollar General. In order to address this uncertainty, Dollar General has agreed to divest up to 1,500 stores should the FTC protest a deal on antitrust concerns, up from the 700 under its previous proposal. In addition to this provision, management has offered Family Dollar a $500 million breakup fee in the event that antitrust issues prevent a deal from closing.

In a previous article I wrote about Dollar General, I highlighted how slower growth prospects (as shown in its most recent quarterly release) might be the big driver behind its push to buy Family Dollar. With sales per square foot of $220, 20% above Family Dollar's $183, just mimicking its current strategy within Family Dollar stores would help push sales up significantly. This would, however, be somewhat offset by the $2.36 billion in sales the business could lose if the FTC does force the retailer to divest the 1,500 locations it's willing to rid itself of (assuming that its store closures have the same revenue per store that the company's average revenue per store stands at in aggregate).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.