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Dollar General goes hostile with Family Dollar bid

A woman walks by the Family Dollar store in Arvada, Colorado October 7, 2009. REUTERS/Rick Wilking

(Reuters) - Dollar General Corp (DG.N) took its $9.1 billion offer for Family Dollar Stores Inc (FDO.N) hostile, directly approaching the shareholders of its smaller rival after being spurned twice by the company.

The move could throw a wrench in Family Dollar's agreement to sell itself to Dollar Tree Inc (DLTR.O) for a lower cash-and-stock deal of $8.5 billion, or 74.50 per share.

Dollar General said on Wednesday it started a cash tender offer to buy all shares of Family Dollar for $80 per share, an offer that was rejected last week by the smaller deep-discount chain.

Family Dollar said the offer did not address antitrust concerns - the same reason it cited for turning down Dollar General's first proposal.

Family Dollar said on Wednesday it continued to support its deal with Dollar Tree. The company said it was reviewing the tender offer and would advise shareholders of the board's position at a later date.

The battle for Family Dollar underscores Dollar General's desperation to scale up as it tries to keep lower-income shoppers from being lured by Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).

Wal-Mart is doubling down on small-format stores, typically one quarter the size of its supercenters, a move that could result in increased competition for Dollar General.

Family Dollar has raised concerns that the Federal Trade Commission will challenge a deal with Dollar General as it can lead to higher prices in areas where only the two chains are present.

Dollar General sought to assuage such concerns by committing to sell up to 1,500 stores and offering to pay $500 million as break-up fee if the deal fails to clear antitrust reviews.

The company said on Wednesday it would stick to those terms.

"We now can begin the antitrust review process and will have an opportunity to present our position directly to the FTC," Dollar General Chief Executive Rick Dreiling said.

Family Dollar's shares were down marginally at $78.55 Wednesday morning, valuing the company at about $8.9 billion.

The company's CEO, Howard Levine, is the largest shareholder with an 8.17 percent stake as of Aug. 5. Any deal could fetch him between $690 million and $750 million.

Nelson Peltz's Trian Fund Management L.P. had a 7.34 percent stake in Family Dollar as of July 27, while John Paulson's Paulson & Co Inc reported a 7.04 percent stake on June 30.

Dollar General's tender offer is scheduled to expire on Oct. 8 unless extended.

Reuters reported on Tuesday that Dollar General would go hostile with its offer, citing people familiar with the matter.

Dollar General's shares were little changed at $63.38 on the New York Stock Exchange.

(Reporting by Siddharth Cavale in Bangalore; Editing by Saumyadeb Chakrabarty)