Thursday, August 21, 2014

The Ugly End Game: Family Dollar

The Ugly End Game: Family Dollar

Earlier this week Dollar General made an all-cash $9.7 billion or $78.50 per share bid for Family Dollar.  The bid tops the Dollar Tree’s cash and stock offer of $9.2 billion or $74.59 per share, which was accepted by the board of directors.  On August 9, I wrote about this deal and the prospect of a higher bid in the News & Observer.[1]  With Family Dollars stock trading at $79.50, traders are betting that Dollar General or Dollar Tree is going to pony up a few more dollars per share for the company.

As I discussed in my column, the Family Dollar deal is following a familiar script.  Dollar General’s cash offer, and the ensuing reaction is merely another act in this play.  Dollar General and Family Dollar are huddling with their lawyers, bankers, and publicists in an attempt to gain the upper hand.  Dollar General and Carl Icahn are claiming that Family Dollar CEO Howard Levine tried to cut a “friendly” deal with Dollar Tree in order to save his job.  There’s nothing unusual about that charge.  Most CEO’s are given some role in the combined company, and most of those CEO’s don’t last too long.  It’s all part of the script.

Family Dollar Store’s board has rejected Dollar General’s proposal on anti-trust concerns.  There’s certainly significant overlap between the two companies, and real concern that any deal with Dollar General could be tied up by regulators.  However, there’s a ready-made solution: divestiture.  The newly combined business could sell stores to Dollar Tree.  Even better Dollar Tree would have $300 million in cash to buy those stores because Dollar General would have to pay Dollar Tree a break up fee if it succeeds. 

What’s most interesting to me how is how publicists and analysts are turning Family Dollar into this unique and precious asset that is worthy of a bidding war.  Before the bidding began, Family Dollar was seen as a troubled business whose margins were under pressure.  I’m guessing that Dollar General is going to come out the winner in this transaction, even if it doesn’t acquire Family Dollar.  If it wins the bidding war, Dollar General seems better positioned than Dollar Tree to extract cost savings and operating efficiencies.  In short, Family Dollar is more readily digestible to Dollar General.   If Dollar Tree comes up with a winning bid, Dollar General will have made sure that one of its competitors has paid a steep price and saddled itself with considerable debt.

In the end, I’m guessing Dollar Tree will sweeten its bid, and win the day.  Either way a bunch of hedge funds will be very happy.


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