Will Dollar General's Hostile Bid on Family Dollar Succeed?

Discount retailer, Dollar General Corporation DG has made a hostile bid on its rival Family Dollar Stores Inc. FDO after the latter rejected its earlier bids. This time Dollar General took its $9.1 billion or $80 per share bid, which is the same as it previously offered, directly to the shareholders.

Moreover, the direct approach would facilitate this discount retailer to commence discussions with Federal Trade Commission over regulatory hurdles.

This bid was rejected by Family Dollar citing ‘antitrust concerns' and it decided to stick with Dollar Tree Inc.'s DLTR less juicy bid of $74.50. Noticeably, Dollar General's proposal represented an astounding premium of 31.9% over Family Dollar's closing price as of Jul 25, 2014.

Dollar General also agreed to offload up to 1,500 stores against 700 announced previously to win antitrust concerns. The company had earlier confirmed that it was ready to pay a $500 million reverse termination fee if the proposed transaction did not materialize on regulatory grounds. Thus, a spurned Dollar General went hostile.

Dollar General's bid, which expires on Oct 8, 2014, will decide the fate of the ongoing tri-party struggle. If Dollar general succeeds, a giant will be formed in the box discount retail space from the merger, throwing serious competition to retail primes such as Wal-Mart Stores Inc. WMT and Target Corporation. The combined company will have the capacity to operate close to 20,000 stores in 46 states. Dollar General expects revenues to hit over $28 billion and the deal to generate synergies of $550 million to $600 million at an annual rate three years after the deal is closed.

The acquisition will enhance the buying power of the pair, providing better negotiating terms against suppliers. The combined company will also be able to offer broader and multiple assortments at more compelling prices. Moreover, the transaction will help in achieving operational and distribution efficiencies as well as cost synergies. Post-acquisition, the companies will be able to tap new markets, enhance market share in the existing ones, extend the sales channel and generate significant cash flow to increase store count.

For now, it remains a ‘wait and see' story.

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FAMILY DOLLAR FDO: Free Stock Analysis Report
 
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