Dollar Tree sparks bidding war for Family Dollar

Published August 28, 2014 by Robert Powell, III

Many Americans got used to shopping at dollar stores during the Great Recession, and they haven’t kicked the habit.

Now Chesapeake-based Dollar Tree Inc. (the No. 3 retailer in the category in term of sales) is trying to acquire Family Dollar Stores Inc. (No. 2) in an $8.5 billion deal announced in July.

With 13,000 stores and $18 billion in annual sales, the combined company would surpass the current category leader, Dollar General, to become a major rival to discount retail giant Wal-Mart Stores Inc.

Dollar General, however, isn’t willing to surrender its lead. It made an $8.9 billion bid for Family Dollar on Aug. 18.

Dollar General would pay $78.50 for each Family Dollar share. That’s $4 more per share than Dollar Tree’s $74.50 July offer, which includes $59.60 in cash and $14.90 in stock. Dollar General also offered to pay a $305 million breakup fee Family Dollar would owe to Dollar Tree if its deal is rejected. 

Combined, Dollar General and Family Dollar would create a company with 20,000 stores and annual sales of more than $28 billion.

Some Family Dollar shareholders, including billionaire Carl Ichan who holds 9.4 percent of its outstanding shares, complained that the Dollar Tree offer was too low.

Family Dollar's board of directors rejected the Dollar General bid on Aug. 21, citing concerns about possible antitrust issues.

Dollar stores have been depicted as one source of the recent woes of Wal-Mart, which has seen declining same-store sales. Analysts say the smaller dollar stores offer consumers savings and convenience when they want to make quick shopping trips to pick up a few items.

In February, Michael Exstein, an analyst with Credit Suisse, suggested that Wal-Mart buy Family Dollar. Instead, Wal-Mart announced plans that month to build more of its own smaller-format stores — Neighborhood Market and Wal-Mart Express. 

During the current fiscal year, Wal-Mart will open 270 to 300 small stores, up from the 120 to 150 originally planned.

Dollar Tree says a deal with Family Dollar would broaden its reach. Dollar Tree targets a broad range of middle-class customers with stores located primarily in suburban areas, while Family Dollar caters to low- and lower-middle-income households with stores in urban and rural locations.

All of Dollar Tree’s merchandise is sold for $1 or less, while Family Dollar and Dollar General both sell goods at multiple price points.

Dollar Tree’s net sales rose to $2 billion in its first quarter, which ended May 3. That’s a 7.2 percent increase from the same quarter last year. Earnings per diluted share for the quarter were 67 cents, an increase of 13.6 percent since the first quarter of 2013. Second­­­­-quarter earnings were scheduled for release in late August.