Dollar General Outbids Rival for Family Dollar Stores

If Dollar General's offer is accepted, the combined company would have 20,000 stores, $28 billion in sales and a lot of leverage.
Iris DorbianAugust 18, 2014
Dollar General Outbids Rival for Family Dollar Stores

Dollar Tree has been outflanked (at least for the time being) in its bid to buy Family Dollar Stores by rival Dollar General, which offered $8.95 billion in cash on Monday to buy the second largest U.S. discount retailer.

Dollar GeneralIf the offer is accepted by Family Dollar Stores, Dollar General’s position as the leader in the U.S. dollar stores market will be solidified, reports Reuters.

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According to the newswire, “a combined Dollar General-Family Dollar would have nearly 20,000 stores across 46 U.S. states and annual sales in excess of $28 billion.”

Dollar General says the “combined synergies” of the takeover of Family Dollar Stores would be $550 to $600 million three years after the deal is completed. Dollar Tree, on the other hand, said it expects $300 million in annual savings by 2018. To ensure regulatory approval for the deal, Dollar General says it is preparing to divest up to 700 of its retail stores.

At a time when an increasing number of budget-conscious consumers are flocking to dollar stores instead of big-box retailers, news of the Dollar General offer is generating considerable interest.

Joseph Feldman, an analyst at Telsey Advisory Group, tells Reuters, that, “Both Dollar General and Dollar Tree have some capacity to go a little bit higher with the offer price.”

Analysts tell Reuters that because Dollar General, like Family Dollar Stores, sells items at multiple price points, while Dollar Tree sells items of $1 or less, Dollar General would most most likely be a better fit for Family Dollar than Dollar Tree would be.

Goldman Sachs and Citigroup Global Markets will provide finding for Dollar General’s proposed offer, which includes “a $305 million termination fee payable to Dollar Tree.”

Monday afternoon, Standard & Poor’s placed Dollar General on “creditwatch negative,” saying “we expect the revolver, term loan and notes anticipated to fund this transacation would lead to a speculative-grade corporate credit rating for the combined Dollar General-Family Dollar.”

S&P credit analyst Diyer Iyer said that if the deal goes through Dollar General’s leverage would increase to the 5.0x range, “a significant increase from the mid-2.0x in the 12 months through its latest quarter.

Family Dollar and Dollar General shareholders are responding positively to the news of the possible merger. Dollar General’s shares rose 10.40%, trading at at $63.46, as of 2 p.m. on Monday, while Family Dollar’s stock was up 5%, trading at almost $80 per share, a 52-week high.

Shares of Dollar Tree were down 2%, trading at $54.50.

Source: Dollar General enters race for Family Dollar with $8.95 billion bid

Photo: Wikimedia Commons, Ildar Sagdejev, CC BY-SA 2.0