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Deal Professor: Family Dollar??™s Rejection of Dollar General Is About More Than Money
Published at 22 August 2014, 10:11 GMT

In the latest dollar wars, it is not about the money. Family Dollar has been at the center of a tug-of-war, as two of its biggest competitors in the industry woo it. On Thursday, it rejected a nearly $9 billion bid by Dollar General that was intended to break up the agreed-to combination of Family Dollar and Dollar Tree.

Dollar General has offered more money to Family Dollar shareholders than Dollar Tree’s $8.5 billion deal, but it was not enough to sway the Family Dollar board. Instead, the Family Dollar board unanimously rejected Dollar General’s bid out of concerns over antitrust approval, tinged with doubts that Dollar General was even a serious bidder. Rejecting a bid over concerns other than price when a higher offer is in place is dangerous ground for any board. Family Dollar’s shareholders are bound to be wondering how this money can be left on the table.

But Family Dollar’s board may not have had a choice. A director of Family Dollar, Edward P. Garden of Trian Fund Management, summarized the problem when he stated in a news release on Thursday that “we will not jeopardize the Dollar Tree deal for a transaction with Dollar General that has a high likelihood of not closing due to antitrust considerations.”

So what is going on?

Family Dollar is forced to abide to the terms of the acquisition agreement it entered into with Dollar Tree. That agreement permits Family Dollar to speak with Dollar General only if the Family Dollar board deems that Dollar General’s proposal would be superior to Dollar Tree’s. The acquisition agreement further states that a superior proposal is one that “is reasonably likely to be completed on the terms proposed.”

So in order to move forward with the Dollar General bid, Family Dollar’s board had to find that the antitrust risk was not a significant risk to the completion of any deal with Dollar General.

Dollar General offered in its initial bid to divest up to 700 stores, a number that it said was “approximately the same percentage of the total combined stores represented by the 500-store divestiture commitment in the Dollar Tree merger agreement.”

But for Family Dollar, this was not enough. The two companies are No. 1 and No. 2 in the “dollar store” space. And although they could all use some name differentiation, there are differences among all three companies.

At Dollar Tree, everything costs a dollar, literally, while at Family Dollar and Dollar General it is generally $10 or less. Not only do Family Dollar and Dollar General have similar business models, there is also more store overlap. According to a person close to Family Dollar, the board believes well more than 700 stores would need to be sold off for such a merger to pass muster.

This is the problem. Once Family Dollar’s board determined that more divestitures were needed, then the acquisition agreement required the company to reject Dollar General’s bid since the proposal was not reasonably likely to lead to a superior deal capable of completion. And no doubt Dollar Tree’s counsel was there, arguing that under the acquisition agreement there were no grounds for Family Dollar to even speak to Dollar General.

Not surprising, Dollar General disagrees. According to a person briefed on the matter, there should be no significant antitrust risk problems, because the market that Dollar General and Family Dollar are in is a “fill-in” market where people shop for items in addition to supermarkets. Thus, it is quite competitive with not just the dollar stores, but convenience stores.

And that is the difference between the two positions. Family Dollar appears to view the world as dollar stores with only a few competitors, while Dollar General is trying to make it about convenience stores and the like. And while the success of the deal depends on that, for now Family Dollar sees too much risk.

Shareholders may be upset, but a shareholder activist Family Dollar is ironically helped in making its case by a shareholder activist. Nelson Peltz’s Trian Fund Management holds 7.34 percent of Family Dollar, and Mr. Garden is Trian’s representative and one of the four independent directors considering the deal on Family Dollar’s board. The fact that Mr. Garden is voting to reject the Dollar General bid is an outward signal that the board is acting appropriately.

In truth, the history of the parties may be leading the Family Dollar board to think that Dollar General is simply trying to muck up the combination of Family Dollar and Dollar Tree.

If you want a precedent for this, look at the bidding for Dollar Thrifty Automotive Group. The first attempt at a merger between Hertz and yet another dollar, Dollar Thrifty, was voted down by shareholders in favor of a proposal by Avis that never succeeded. (After several years, Hertz finally won, but not without a lot of back and forth.) Family Dollar doesn’t want to be another Dollar Thrifty.

Family Dollar recently detailed the negotiations it had with both Dollar General and Dollar Tree before the Dollar Tree deal was announced. In a Securities and Exchange Commission filing for Family Dollar’s shareholder meeting to approve the deal, Family Dollar described the talks that led to the Dollar Tree deal.

In this recounting, which was written by Family Dollar, Dollar General flickers in and out of the negotiations, and disappears inexplicably. Dollar General’s chief executive appears to make an offer, but then appears to be hesitant to negotiate because of the presence of Carl C. Icahn as the largest shareholder of Family Dollar (at the time, he owned 9.4 percent but now owns 3.6 percent). Dollar General stated that it simply didn’t want to negotiate with Mr. Icahn.

The parties then meet and Dollar General states it is not interested in a transaction. It then simply disappears without any formal bid, according to Family Dollar. With no bid forthcoming from Dollar General, Family Dollar then decided to negotiate exclusively with Dollar Tree.

On Wednesday, Dollar General offered its own account. First, the company played the self-interest card stating that the chief executive of Family Dollar, Howard R. Levine, expressed “his desire to be chief executive officer of the combined companies” and that Dollar General wondered whether their rejection of this point “weighed into Family Dollar’s decision to pursue an agreement with Dollar Tree.”

Dollar General also stated that had it known about the imminent Dollar Tree deal,
“we assure you that our course of action would have been different,” and they would have been a more eager bidder.

In other words, Dollar General is implying that it didn’t disappear, but that it wasn’t told of what was going on with another party, so it did not pursue Family Dollar more aggressively. And perhaps the chief of Family Dollar is to blame.

Needless to say, Mr. Levine was not happy about these statements, and he said on Thursday that the Dollar General letter “contained blatant mischaracterizations.”

Clearly, the two parties are acting a bit childish trading he said/he said accusations trying to spin the public, when perhaps they should be focusing more on the business terms. But such is a takeover where chief executive egos can shine and the past cannot be forgotten.

So where does that leave us?

Well, Family Dollar’s stock price continued to trade Thursday morning well above Dollar Tree’s offer of $74.50 a share. Dollar General will continue its pursuit of Family Dollar, but without putting up more of a defense of the antitrust issues, Family Dollar will be stuck.

The question will then become whether Family Dollar’s shareholders are willing to vote down a bird in the hand — the Dollar Tree acquisition — for the uncertain Dollar General one. For this, we’ll have to see whether the Family Dollar stock price comes down to earth. If not, then Dollar Tree will have to decide whether to raise its bid.

It’s a convoluted dance, but this leaves the next move with Dollar General. Family Dollar will be looking for Dollar General to offer some type of “hell or high water” provision that would force the company to get rid of more stores if there are antitrust problems.

The question is whether Dollar General offers such a provision up in order to show that “look ma,” there really are no antitrust issues. Alternately, this battle will simply continue with a he said/she said tale of a failed relationship. And we all know how well that works.
Steven Davidoff Solomon
Nytimes.com news - Business
 
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