Dollar General (DG) is refusing to take no for answer in its fight for Family Dollar (FDO). For those just getting up to speed on the story, in July Family Dollar agreed to be acquired by smaller rival Dollar Tree (DLTR) for $74.50 a share or $8.5 billion in cash and stock. As part of the deal Family Dollar agreed to a $305 million break-up fee. In the world of Family Dollar activist shareholder Carl Icahn, such a fee was obviously intended to “chill other bidders."
Icahn and others have stopped just short of flat-out accusing Family Dollar CEO Howard Levine of accepting Dollar Tree’s lower offer because Levine would be out of a job in the event of a takeover of his company by the much larger Dollar General. Family Dollar claims the government would balk at a combined DG / FDO. With total revenues of more than $28 billion a Family Dollar General mash-up would still be less than ⅓ the size of Target (TGT) and barely large enough to register as a blip on the radar of Walmart (WMT).
In a letter released this morning Dollar General raised its bid to $500 million and adds a “reverse break-up fee” to Family Dollar if the FTC refuses to allow the merger. DG also says it’s willing to close up to 1,500 locations in shared markets. The latter has a whiff of cynicism about it given the fact that wiping out that many jobs would likely be part of the plan regardless given how expensive the bid has become. At $80 a share Dollar General is offering well over 20x trailing earnings for Family Dollar in an industry where the best days of growth are almost certainly in the rearview mirror.
As Mike Santoli points out in the attached clip, the real loser here could very well be whichever company ends up trying to manage a combined dollar store kingdom.
“This industry has had a massively great run for ten years. They’ve benefited from the recession and the bad jobs situation after the recession. Right now everyone has sort of learned their game. They should be closing stores and even the previous bid for Family Dollar by Dollar General was promising meager synergies over a bunch of years. Now they’re paying a higher price. I think it looks like a winner’s curse.”
How to Play
At this point it seems to have gotten deeply personal between the three families of deep discount retail. When that happens it’s usually the companies waiting out the storm that end up with the spoils. In this case the long-term beneficiary of a Dollar General / Family Dollar / Dollar Tree three-way scrum is going to end up being Walmart and possibly Target. Both of the discount kings have been trying desperately to move into smaller footprint stores in a way that moves the needle.
Chasing Family Dollar’s stock higher after it’s already gained more than 30% isn’t a bargain but waiting for a couple years and gobbling up an overpriced chain with $30 billion in combined revenues during a recession would be a boon for either Walmart or Target. There’s also the possibility that a spurned Dollar Tree gets left at the altar, too small to compete effectively but too big to be attractive to non-retail financial investors.