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Dollar General ups the ante for Family Dollar

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The dollar store space just got a lot more interesting. Dollar General (DG) is now in the running for Family Dollar (FDO). The biggest of the dollar store chains made a bid to buy Family Dollar for $9.7 billion, or $78.50 a share. The offer is $4 more than the $74.50 offer Dollar Tree (DLTR) made for Family Dollar last month.

"For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares," Dollar General's CEO Rick Dreiling said in a statement. 

Right now, it is not clear if a bidding war will break out for Family Dollar, but Yahoo Finance Editor-in-Chief Aaron Task says it’s very likely that Dollar Tree may come back with a counteroffer.

Family Dollar was under pressure from activist shareholders to put itself up for sale. Billionaire investor Carl Icahn disclosed in June that it had a 9.4% stake in the company. Icahn had pushed for Family Dollar to hook-up with Dollar General before Dollar Tree made an offer for the second biggest discount retailer. Icahn has been scaling back his stake in Family Dollar ever since Dollar Tree made an offer to buy the company in July. 

The combination of Dollar General and Family Dollar will create a chain with almost 20,000 stores in 46 states and more than $28 billion in revenue. On the other hand, a merger between Family Dollar and Dollar Tree would create a company with more than 13,000 stores and more than $18 billion in sales. Dollar General said it was prepared to sell up to 700 stores to alleviate antitrust concerns.

Related:  Dollar Tree buying rival Family Dollar For $8.5 billion 

The dollar store industry has been trying to fight off competition from some bigger players like Wal-Mart (WMT), which have been opening up smaller stores. Last week, the world’s largest retailer reported same-store sales at its Neighborhood Market stores increased 5.6% compared to a year ago, outpacing the growth of traditional stores and e-commerce. Wal-Mart also said it plans to open up to 200 smaller format stores this year. 

Task said this could also be an opportunity for Wal-Mart to grab a bigger piece of the the smaller store segment in one fell swoop.