Family Dollar, a troubled discount store, is up for sale. They have entered an agreement to merge with Dollar Tree for US$8.5 billion. Recently, Dollar General, a competitor, offered US$9.7 billion. On August 21, 2014, Family Dollar’s board unanimously rejected Dollar General’s offer and reasserted their desire to go forward with Dollar Tree. The grounds were that Dollar General failed to address Family Dollar’s antitrust concerns. Somewhat ironically, this rationale has likely given Dollar General a roadmap to a bid that Family Dollar’s board couldn’t refuse without breaching their fiduciary duties.

Substantive antitrust issues rarely arise in mergers and acquisitions. When they do, they can have significant ramifications. The government can demand meaningful divestitures or even sue to block a deal. When considering competing bids, all other things being equal, a seller looking at a strategic and financial buyer should always pick the financial buyer. They will have no antitrust issues, and therefore no chance of delay or litigation. Potential strategic buyers must compensate sellers for the additional risk as well as shift some or all of this risk to themselves to produce a superior bid.

In the Family Dollar case, you have two strategic buyers competing against each other. It is perfectly logical and expected that the Family Dollar board would consider which of the two offers would raise fewer antitrust issues and thus represent the clearest path to consummation. The press is reporting that Dollar General offered to sell up to 700 stores to obtain regulatory approval, and that offer equaled the offer from Dollar Tree. Family Dollar’s chairman and CEO, Howard Levine, stated that “[o]ur board reviewed, with our advisors, all aspects of Dollar General’s proposal and unanimously concluded that it is not reasonably likely to be completed on the terms proposed.” The press is also reporting that Family Dollar stated that its board attempted to meet with Dollar General’s lawyers on the antitrust issues but was rebuffed.

Ultimately, in order to block a deal on antitrust grounds, the U.S. Department of Justice or Federal Trade Commission has to prove in court that the transaction is likely to substantially lessen competition or tend to create a monopoly. What sort of transaction is likely to substantially lessen competition is a complex inquiry involving a lot of theory and prognostication. At the stage where a seller is taking multiple bids, it is highly unlikely that anyone has sufficient facts to judge with any precision whether a potentially problematic deal could make it through to consummation. In fact, two perfectly reasonable, similarly situated antitrust lawyers could come up with two diametrically opposed opinions about the likelihood of a transaction’s success.

Absent any actual facts, the foregoing suggests, at a minimum, that an antitrust lawyer has told the Family Dollar board that it is likely that the agencies would require more divestitures from Dollar General than Dollar Tree, and that with a limit of 700, it is likely the agencies would not accept a consent and sue the parties to enjoin the deal. At this stage of the process, it is highly likely that you could find a reputable antitrust lawyer that would give the opposite opinion, that that deal could in fact proceed with a divestiture package of some sort near 700 stores or less. But Dollar General’s hands are tied. They cannot force the Family Dollar board to believe one expert over another no matter how famous or reasonable sounding the expert is.

But that doesn’t mean that Dollar General is without options. In fact, by stating that Dollar General’s bid was unacceptable because it raised more antitrust risk, Family Dollar may have painted itself into a corner. All Dollar General has to do now is eliminate that risk for Family Dollar. It does so by offering Family Dollar a “hell or high water” clause. It promises Family Dollar that Dollar General will do everything in its power to consummate the transaction including divestitures or litigation.

For Dollar General, the worst case scenario associated with a hell-or-high-water offer is that the agencies would require it divest an entity of the same competitive significance as Family Dollar—Dollar General would keep what it wanted but would have to come up with some cluster of assets that would create an entity competitively equivalent to Family Dollar. Otherwise, Dollar General goes to court. The best analogue for this “worst case scenario” is the Whole Foods/Wild Oats transaction. In that case, the FTC sued to enjoin the merger of two specialty organic grocery stores. The FTC lost at the district court level, appealed, and won on appeal. The loss at the district court level meant that Whole Foods was allowed to consummate its transaction, which it did. Ultimately, looking at a new trial, Whole Foods settled with the FTC. The package consisted of a good number of stores Whole Foods had already shuttered. The Whole Foods deal was announced in August 2007 and was settled in April 2009. Whole Foods spent a small fortune in legal fees dragging the deal through the courts, and while it lost on appeal, it ultimately got most of the deal it originally wanted.

The key for Dollar General in deciding whether to offer the hell or high water would be to conceptualize a potential divestiture package that looked almost exactly like Family Dollar, determine whether they could stomach that divestiture and still justify the deal, and then classify assets within that package based on how much they would like to keep them. At the outer circle would be the assets they would like to keep most; in the innermost circle, the assets they would give up without much concern. Dollar General would then start floating packages starting with the smallest cluster of assets. They would also need to identify potential buyers. Those buyers would need to be bona fide buyers; straw men would be dismissed. Dollar General would also have to be judicious about which packages they in fact floated. The agencies will begin to distrust Dollar General if they go to the well too many times.

For Family Dollar, it would ultimately receive full consideration irrespective of the outcome, so the only issue for it would be time. But since the next-best bidder also raises antitrust issues, it would be difficult for them to argue the trajectory offered by Dollar Tree would necessarily be shorter than the one offered by Dollar General. And it would be difficult to conclude that whatever additional time Dollar Tree could give them would be worth the certainty and additional US$1.2 billion Dollar General is coughing up.

Ultimately, if Dollar General made the hell-or-high-water offer, the Family Dollar board should find Dollar General’s bid very difficult to resist without violating their fiduciary duties. At that point, Dollar Tree would either have to offer their own hell-or-high-water clause and the additional value or drop out. In either event, Dollar General wins because either it got Family Dollar or it has a larger but financially weaker competitor. It seems like Dollar General has come out ahead.