General said on August 28, 2014 that it is “fully” committed to the Family Dollar deal. Bloomberg is reporting that “people familiar with the matter” said last week that Family Dollar is willing to consider Dollar General’s offer if it agrees to sell as many stores as regulators would require (see our previous blog post on this matter). I also saw somewhere a suggestion that the dialogue with the agencies has already started. If so, there is now timing pressure on Dollar General to get that bid in. If Dollar Tree is able to get substantially down the path with the investigating agency, then the relative timing difference between the two bidders does in fact become an issue. The agency would have to start the process over with Dollar General, delaying consummation by a potentially significant amount. If there is a clear path to a deal with Dollar Tree at the agency, even at significantly less and without hell-or-high-water clause, the Family Tree board could quite legitimately conclude Dollar Tree is still the best mate.
But it’s unclear if/when Family Dollar and Dollar Tree have filed HSR, how much has been done, and how far along the parties are in coming to a consensus on a divestiture package with the agencies. I doubt that either Family Dollar or Dollar Tree has made much progress. Indeed, I suspect that Family Dollar and Dollar Tree are expecting a normal, slow, congenial-ish second request process and haven’t done much at all with the agencies. That could be an advantage for Dollar General.
If Dollar General is serious about pursuing a genuine bid for Family Dollar, Dollar General should consider starting to respond in earnest now to what they anticipate a second request would look like. The second request process is laborious and time consuming. Responding can take months. While the second request is tailored to the particular industry being investigated, there are many common elements to most second requests that can be anticipated fairly easily with the right advisors, however. Starting now would minimize any “timing” arguments Family Tree’s board might make. And, in fact, through its own process, Dollar General may be able to establish a persuasive factual and analytical basis to support the contention that Dollar General could close the deal with minimal divestitures in a shorter amount of time than Dollar Tree. That could be quite important to the Family Dollar board. And if the Family Dollar/Dollar General deal does go through, Dollar General could use the analysis it’s compiled to raise serious questions about any package the successful parties put up and perhaps position itself as the best “upfront buyer” for those assets.
Practically, Dollar General should reach out to the agencies now, tell them that they are planning on making a superior bid for Family Dollar and are beginning the “antitrust process” internally. The agency will likely ignore them formally and for the time being because Dollar General’s offer isn’t “ripe.” The agencies will not offer guidance or engage on deals that aren’t signed. Dollar General is a major competitor to the parties in the Family Dollar/Dollar Tree deal, however, so the agency should be interested in whatever Dollar General has to say on a less formal basis.
Logistically, Dollar General should hire an economist; start putting together a substantive analysis of the synergies, overlaps and other potential problems; identify potential divestitures and begin the process of finding an up-front buyer. (Dollar General has to be careful about what data they pull from Family Dollar’s data room. Confidentiality likely limits what they can disclose to the agencies before a deal with Family Dollar is inked. The confidentiality agreement should not limit the ability of Dollar General to start analyzing the data as part of its diligence process, however, so they should use that data. Indeed, if there should be alternative public sources for some of the most relevant data, they could in fact use those data points under most agreements. And, if a deal is inked, Dollar General could use the data then.) They should also begin the technical response to a second request: identifying “quick look” custodians, likely second request custodians and back pocket custodians; imaging their drives and common email, document and data servers; pulling and processing documents from those custodians; identifying potential data requests and starting to pull data. These exercises should be done on a very fast track.
While this approach may seem wasteful and expensive because you haven’t seen the subpoena and there is a possibility that Dollar General might lose, the unexpected portions of the second request will be at the margin and easily answered during the process, and the few million spent to accomplish this process may very well mean that the Family Dollar/Dollar General deal goes forward. Backing of the Dollar General’s board and c-suite for this approach is critical for these tactics to be successful. There is a lot of work, expense and risk associated with this tactic. Making sure the team knows it’s a priority will ensure the cooperation necessary to get the process rolling and completed such that it can affect both the negotiation and antitrust process positively. Support also ensures that if this effort fails—which it may in fact do—the folks who advocated the aggressive strategy will not feel vulnerable.
If the desire to do the deal is strong, this strategy will give Dollar General an advantage in the bidding process and should ultimately allow them to close sooner than they would otherwise. Doing this work now will give them a better picture of what their “worst case scenario” of divestitures might look like. It will also position the company best to pick up any pieces if Dollar Tree is ultimately successful. But there has to be buy in by Dollar General’s board and c-suite because the time and expense as well as the risk of failure of this approach will be high. Note, too, that just because they begin the process doesn’t mean they have to complete it. If it appears Family Dollar is not an option, Dollar General can shut the whole thing down.