Family Dollar Board Of Directors Rejects Revised Proposal From Dollar General Based On Antitrust Issues

Family Dollar Stores, Inc.

announced today that its Board of Directors has unanimously rejected the revised, non-binding proposal made by Dollar General Corporation

on September 2, 2014, on the basis of antitrust regulatory considerations. Family Dollar's merger agreement with Dollar Tree contains a customary provision that permits Family Dollar to enter into discussions and share information with any competing bidder, but only if the Board is able to determine that failure to do so would be inconsistent with its fiduciary duties and that the unsolicited, written proposal from the competing bidder would be reasonably expected to lead to a proposal that is not only financially superior, but also “reasonably likely to be completed on the terms proposed.” Howard R. Levine, Chairman and CEO of Family Dollar, said, “Our Board of Directors, with the assistance of outside advisors and consultants, reviewed all aspects of Dollar General's revised proposal and unanimously concluded that it is not reasonably likely to be completed on the terms proposed. There is a very real and material risk that the transaction proposed by Dollar General would fail to close, after a lengthy and disruptive review process. Accordingly, our Board has rejected Dollar General's revised proposal and reaffirmed its support of the transaction with Dollar Tree, which delivers attractive value in the form of immediate upfront cash and upside participation in a combined Dollar Tree-Family Dollar entity, as well as closing certainty.” Ed Garden, a Family Dollar director and co-founder and Chief Investment Officer at Trian Fund Management, L.P., a large shareholder of the Company, stated, “We are focused on delivering to Family Dollar shareholders the highest value with certainty, and the Dollar Tree transaction does just that. Dollar Tree has taken the antitrust risk off the table by committing to divest as many stores as necessary to obtain antitrust clearance. We remain fully committed to the Dollar Tree transaction.” Mr. Garden continued, “Dollar General's revised proposal, on the other hand, does not eliminate regulatory risk for Family Dollar shareholders. Dollar General has repeatedly stated that antitrust is not a risk, yet they have put forth proposals that require Family Dollar shareholders to bear the ultimate risk. Receiving a reverse breakup fee with an after-tax value of less than $3 a share does virtually nothing to compensate the Family Dollar shareholders for assuming that risk.” The Family Dollar Board's unanimous determination to reject Dollar General's revised proposal and to accept Dollar Tree's commitment to divest as many stores as required for antitrust approval follows the unanimous recommendation of a committee of four non-management independent directors that has been overseeing the Company's consideration and exploration of strategic alternatives since January 2014. This committee consists of Glenn A. Eisenberg, Ed Garden, George R. Mahoney, Jr., and Harvey Morgan. Understanding the Antitrust Risks In rejecting Dollar General's revised proposal, the Family Dollar Board took into account, after consultation with its outside advisors, the following considerations: Federal Trade Commission (“FTC”) Review. Family Dollar, unlike Dollar General, is already deeply involved in the FTC's review of its transaction with Dollar Tree and has seen first-hand the issues and types of evidence that the FTC is focusing on, all of which have completely confirmed its regulatory analysis. The FTC's antitrust analysis in retail mergers is well established. The FTC examines specific evidence - actual pricing data, pricing policies, and internal company documents - to determine whether a transaction is likely to lead to higher consumer prices. The mere fact that other retailers sell the same products is not a sufficient defense if these other retailers do not impose the same pricing constraints that the parties to the proposed merger impose on each other. Specifically, the FTC asks what would happen under each of the merging parties' current pricing policies if the parties no longer had to compete with each other. In the past, where merging parties have used “zone pricing” to lower prices only in local geographies where they compete with each other, the FTC has taken the position that prices will go up post-merger and has challenged or blocked mergers on that basis. The FTC has already seen extensive evidence that Dollar General is a major factor in Family Dollar's pricing. Far more than 1,500 Family Dollar stores are in zones where pricing is based solely on the presence of local Dollar General stores, and thousands more are in zones where pricing is based on both Dollar General and Wal-Mart stores nearby. The FTC's antitrust policy guidelines and precedents and Family Dollar's first-hand experience with the FTC over the last several weeks confirm the serious risk that the FTC will take the position that Family Dollar's pricing policies would immediately lead to higher prices in thousands of locations if Dollar General were no longer an independent competitor. There is a substantial risk that the FTC will assert that a transaction between Family Dollar and Dollar General will lead to higher pricing, regardless of how Dollar General sets its own prices. The FTC's Horizontal Merger Guidelines and consistent enforcement policy make clear that it will look at both sides of the equation - how Dollar General affects Family Dollar's pricing, and vice versa. Dollar General's assertion that the FTC will only focus on its documents and pricing policies is incorrect and misleading. Dollar General does not assert that Family Dollar has no effect on its prices. Rather, Dollar General says that its own pricing is driven “primarily” by Wal-Mart. Presumably the limited nature of Dollar General's statement is because some of Dollar General's prices are set based on Family Dollar, particularly in the thousands of local areas where Wal-Mart is absent. Dollar General indicates that around 25% of SKUs may be priced based on local pricing zones. The FTC will likely be concerned that these prices will increase due to the transaction, and much more than 25% of the volume and revenue may be impacted, as Family Dollar believes that Dollar General uses zone pricing for many high-volume or high-revenue SKUs. Thus, the volume and revenue associated with these zone priced SKUs may be much more significant than the number of zone priced SKUs. Dollar General has acknowledged its similarity to Family Dollar. Richard Dreiling, Dollar General's Chief Executive Officer, complicated the antitrust defense of its own proposal considerably by publicly suggesting, at the time of the initial proposal, that Family Dollar is a more important competitor to Dollar General than even the small format Wal-Mart stores: “I will tell you [Wal-Mart has] opened up several [new stores] against us. In all honesty, the hit we've taken on those so far has actually been less than what happens when a Family Dollar opens up.” The FTC will review the potential impact of the transaction on competition in very narrow local geographies since, as Dollar General notes, the FTC will evaluate competition for “fill-in” trips. A Dollar General merger with Family Dollar would involve nearly 20,000 stores, and the sheer number of local retail overlaps would be among the greatest the FTC has ever reviewed. Dollar General and Family Dollar compete in thousands of local geographies, with more than 6,000 Family Dollar stores competing with a Dollar General store within three miles. Many of these stores - far more than 1,500 - do not have a Wal-Mart within the same distance. The FTC's detailed review of so many local geographic areas would likely result in a prolonged review process. Further, the FTC will likely give this proposed transaction particularly close scrutiny because both Dollar General and Family Dollar focus on selling basic needs at low prices to lower-income customers. Finally, before approval, the FTC would likely require that Dollar General find a divestiture buyer and negotiate and execute an acceptable divestiture agreement. The divestiture buyer would need to be an entity that would be able to maintain the pre-merger competitive impact of these stores. All told, the FTC's review of a Dollar General acquisition could take close to a year or longer if the transaction ends up in litigation. Family Dollar and Dollar Tree anticipate receiving a request for additional information (“Second Request”) from the FTC. A Second Request has been expected, even though Dollar Tree and Family Dollar, unlike Dollar General and Family Dollar, have very different business models, generally sell different products, are not close competitors, and have limited geographic overlap. In addition, Dollar Tree's role in Family Dollar's pricing is insignificant. The fact that a Second Request is expected for the Dollar Tree transaction clearly shows the very close scrutiny a Dollar General transaction would receive. Morgan Stanley & Co. LLC is serving as exclusive financial advisor to Family Dollar and Cleary Gottlieb Steen & Hamilton LLP is serving as legal counsel.