What’s really driving the Family Dollar, Dollar General & Dollar Tree merger war?
Since late 2013 Family Dollar has been in talks with both Dollar General and Dollar Tree about terms of a merger (Take a second and visualize these names, it gets confusing hence forth). According to a press release published on August 21st, Family Dollar was originally considering a deal with Dollar General, but the bigger discount store snubbed the Family Dollar and canceled an initial terms meeting scheduled in January 2014. Family Dollar forged ahead, kicking off a FTC review of a merger, and moved into talks with Dollar Tree by late Spring.
Dollar General came skidding back in as soon as Family Dollar announced a potential deal with Dollar Tree, and quickly submitted a bid. Upon being rejected, the General came back with a renewed proposal, which was also promptly denied. Dollar General is now seeking to complete a forceful takeover, at $80/share, about $5 above Dollar Tree’s proposal.
Dollar General’s reaction is not unexpected, nor is their aggressive take over proposal surprising given the relationship with hostile-take over king KKR. A private equity firm headquartered in New York, KKR known for the takeover of Nabisco in 1988 and for being the premise for the book Barbarians at the Gate. What’s curious are the reasons Family Dollar is rejecting Dollar General’s proposal: close review of Family Dollar’s rejection letters reveals there is little of substance in its rejection. It leads to the question- is there another motivating factor not revealed in these letters?
Family Dollar maintains that the reason for rejecting the offer is that the risk of FTC investigation and subsequent rejection of the Dollar General proposal is inevitable. In their September 5th letter squashing the revised Dollar General proposal, Family Dollar highlights that this would be one of the largest reviews the FTC would ever undergo, and would likely be closely analyzed for pricing processes, which are substantially affected by the presence of competitor stores in the area. It also seems to quake at the thought a year-long review, yet few FTC reviews are so short. It also focuses on the fact that a $50M reverse break-up fee Dollar General offers would only amount to a $3 after-tax value if indeed the FTC prevented the transaction.
While Family Dollar is right to say FTC investigation is inescapable, it does not follow that a merger with Dollar Tree will absolve them from investigation. Dollar Tree is also a big factor in pricing processes, as a main competitor. Dollar Tree will have to close many stores to merge with Family Dollar, something that Dollar General also recognizes it would need to do in its bid. The fact is that any deal will come under FTC review, and it will be an in-depth analysis given the importance of all three chains for low-income consumers.
Are there other reasons Family Dollar might be snubbing the Dollar General offer?
A major component of the Dollar Tree offer is that Family Dollar would be able to retain its name and some autonomy in its management. Maintaining management control might have more sway than the additional $5 earnings per share the General offers. Family Dollar originated as a family-owned company, and continues to be so, with both Leon Levine, the founder, and Howard Levine, his son, sitting on the board. The Dollar General offer does not promise such an opportunity for the family to retain involvement, in fact, it might bring the very opposite.
While talks between Dollar General and Family Dollar began in late 2013, it was clearly communicated between the two companies that merger explorations would not commence until 2014, which coincided with both Goldman Sachs and KKR selling the remainder of their stock in the company. KKR bought Dollar General in 2009 and turned the company around in 3 years, bringing it to a successful IPO in 2011. As a consequence, much of the original Dollar General management was ousted and the brand of the company refocused. On May 30th attorney for Michael Calbert filed a Form 4 indicating the former KKR Partner and head of Retail Investing, who lead the Dollar General acquisition and acted as director at Dollar General, took a significant stake in the company. Such an activist on the board might indeed mean less of a role for the family management in the future of the company, a fate that Family Dollar executives wish to avoid.
Office politics aside, whichever company wins the deal stands to gain big dollars, and the loser risks irrelevance. The consolidation of two dollar stores would enable better competition against other discount-good stores, such as Walmart, as well as differentiation of product lines to better target the “fill-in” needs of their target consumer-base. Being such a make-or-break deal, the family politics will need take a back seat to realpolitik: Family Dollar must consider which merger will enable it actually realized greatest gains for shareholders through expansion opportunities.