Deal would bolster Dollar General against Wal-Mart

NASHVILLE, Tenn. — Dollar General Inc.'s hostile bid for Family Dollar Stores Inc., if approved, could help add market share, boost revenue and bolster the company against its biggest threat in the industry: Wal-Mart.

By combining with Family Dollar's 8,200 stores, the Goodlettsville-based discount chain would have more buying power that would allow them greater pricing flexibility.

"It would help them compete against Wal-Mart," said Mark Montagna, a retail analyst at Avondale Partners in Nashville. "They'd have a better ability to negotiate prices from their vendors, possibly even take the prices lower."

Wal-Mart, meanwhile, is expanding beyond its big-box stores into smaller retail spaces with its Neighborhood Markets and Wal-Mart Express model to fend off the dollar chain stores.

But because the smaller Wal-Marts are still in their infancy, they are less of a threat than Wal-Mart in general, Montagna said.

"You have to look at Wal-Mart as a whole, because they are so good, so dominant," he said. "They are the ones who drive prices lower."

It's a view supported by Dollar General CEO Richard Dreiling, who brushed off the threat of Wal-Mart's newest formats on a conference call last month.

"I will tell you they have opened up several of them against us, and honestly the hit we have taken on those so far has actually been less than what happened when Family Dollar opens up," he said.

Dollar General went hostile with its $9.1 billion bid for Family Dollar on Wednesday after its rival repeatedly rejected previous offers.

The company has commenced an open offering to investors of Family Dollar for $80 per share in cash. That same offer was rejected last week by the company's board, which has already accepted a deal with another discounter, Dollar Tree.

Family Dollar, based in Matthews, N.C., has voiced concerns about Dollar General's deal passing antitrust review by federal authorities. In response, Dollar General has said that it is willing to divest up to 1,500 stores if the Federal Trade Commission requires it. The company also is offering to pay a $500 million reverse breakup fee if antitrust hurdles get in the way.

Family Dollar has been exploring a sale amid considerable financial stress and it has shuttered some of its stores and cut prices in an attempt to increase foot traffic. In June, activist investor Carl Icahn urged the company to put itself up for sale, although he would later sell his stake.

Still, Family Dollar accepted an $8.5 billion offer from Dollar Tree in July. The bid includes $59.60 per share in cash and the equivalent of $14.90 in shares of Dollar Tree for a total of $74.50 for each share held. Family Dollar has backed the bid, saying regulators are less likely to interfere.

There are more similarities, however, between Family Dollar and Dollar General, which stock their shelves with goods that sell for a range of prices. Everything sold at Dollar Tree costs a buck.

Appealing directly to Family Dollar shareholders, Dreiling said in a statement that a sale to his company would provide them with "immediate and certain liquidity for their shares."

Dollar General's offer expires Oct. 8. The latest bid, which was raised from $78.50 per share initially, represents a premium of nearly 32 percent for Family Dollar stock on the day before the Dollar Tree deal was announced in July.

Contributing: The Associated Press