Dollar General yesterday threw an all-cash bid in the ring to acquire Family Dollar Stores that is $4-a-share higher that the $74.50-a-share offer from Dollar Tree that Family Dollar accepted three weeks ago. Anticipating a bidding war to erupt for the retail turf serving the working-poor market, traders sent Family Dollar stock to a close of $79.71 yesterday.
For its part, Family Dollar said in a statement that its board “would review and consider the proposal” by Dollar General, but that it “has not changed its recommendation in support of the merger with Dollar Tree” and would not comment further until it completed its review. Dollar Tree had no immediate response.
“Despite a flurry of official signs that the economy is improving — unemployment benefit claims are down, the stock market has been surging since 2008 — the recovery continues to elude many middle-class Americans,” Michael de la Merced, Nelson D. Schwartz and Elizabeth A. Harris report in the New York Times. “As a result, many are hunting for rock-bottom discounts for their shopping needs.”
“For Dollar General shareholders, the proposed combination of Dollar General and Family Dollar would be a significant strategic opportunity to create immediate and lasting shareholder value,” said Dollar General chairman and CEO Rick Dreiling in a statement detailing the offer. “For both Dollar General and Family Dollar customers, we would be able to provide better value and greater selection.”
Dreiling, who had previously announced his retirement, has agreed to stay on in his current positions through May 2016 to “oversee the integration of the two companies” should a merger go through.
“Despite sharing ‘dollar’ in their names, the three chains follow two different strategies,” report Shelly Banjo, Michael Calia, David Benoit and Brent Kendall in the Wall Street Journal. “Dollar Tree, which has 4,891 stores, sells goods like picture frames and school supplies for a dollar or less. Family Dollar [8,246 stores] is much more like Dollar General [11,338 stores], selling branded consumer products like Tide detergent and Coca-Cola at a range of prices.”
“In the case of the dollar stores, the deals are coming in a sector that has done well in the wake of the recession,” they point out. “The chains have managed to grab traffic from discounters like Wal-Mart Stores Inc. and Target Corp., as low-income shoppers changed habits and began making fill-in trips to buy cheaper goods at dollar stores.”
“Dollar General and Family Dollar are basically the same kind of store — they both sell merchandise across a range of price points, and their product mix is similar,” writes Bloomberg Businessweek’s Venessa Wong atop some helpful charts that illustrate the point.
“Dollar Tree, on the other hand, is a dollar store in the truest sense: Everything costs $1,” Wong continues. “Acquiring Family Dollar would give it diversity beyond its single-price model and a way to expand into urban and rural markets.”
“The dollar store has been one of the great success stories of the recession era, with chains such as Dollar Tree, Family Dollar, and Dollar General posting record sales figures, broad expansions, and soaring stock prices over the past half-dozen or so years,” writes Time’s Brad Tuttle in a piece that traces the evolution of the concept. “Ironically, though, the merger may be a sign that the era of rampant dollar store growth is plateauing, even while many household finances remain pinched and dollar store shopping continues to be popular.”
Walmart and Target have “slowly been rolling out a counteroffensive to dollar stores by way of smaller retail locations, often in the densely populated urban hubs where dollar stores are ubiquitous,” Tuttle points out. And supermarkets are also downsizing to compete in urban areas.
“The latest salvo in the battle to acquire Family Dollar is likely not the end of the bidding contest, but rather ‘probably the beginning,’” Wedbush Securities analyst Joan Storms tells USA Today’s Adam Shell and Paul Davidson. But, Storms says, “the Dollar General offer makes more sense. There are more synergies and earnings accretion from the deal.”
And that’s why, in the end, “Wall Street expects Dollar General will win,” reports Forbes’ Nathan Verdi. “Indeed, Credit Suisse analysts wrote on Monday that synergies from a Dollar General and Family Dollar Stores deal could be worth almost $1 billion, much more than Dollar General predicted on Monday.”
Anyway you look at it, that’s squeezing a lot out of tubes of toothpaste.