Last week, we suggested that Dollar General needs to offer a “hell or high water” clause and begin its response to a potential second request if it wants to eliminate antitrust as an issue in its bid to acquire Family Dollar. It looks like Dollar General has taken a more conservative, incremental step, in an effort to address the antitrust concerns of Family Dollar’s board. Dollar General has upped its bid for Family Dollar to $80 a share and included an offer to divest up to 1,500 stores. Dollar General has also apparently hired Richard Feinstein, a former Director of the FTC’s Bureau of Competition, to “independently review” Dollar General’s antitrust work. According to Feinstein, the Family Dollar/Dollar General transaction could be completed “on the terms previously proposed.”

Mr. Feinstein is an extremely well-regarded antitrust attorney with a great deal of experience, particularly as it relates to the application of antitrust, and the FTC’s version of antitrust, to this deal. Mr. Feinstein’s statement, while likely correct, is still just his opinion. There is nothing about his opinion that would render it inherently more compelling than that of whomever is advising Family Dollar. Under the business judgment rule, Family Dollar’s board is entitled to trust whichever advisor they feel is best. Hiring Mr. Feinstein will not move the dial.

Nor will increasing the number of stores Dollar General is willing to divest. A combination of Family Dollar and Dollar General will have approximately 20,000 stores. Fifteen hundred stores represents about seven percent of the total. A reasonable antitrust attorney could conclude that is simply not enough. The press is reporting that Dollar General has argued that the companies compete with a “host of retailers” like pharmacy chains, convenience stores, Walmart and Amazon. The FTC could take the view that there is a class of customer for whom brick-and-mortar dollar stores are the only close substitutes. As such, you would be looking at a very large Dollar General compared to a much smaller Dollar Tree. In that event, one might argue that, with the Family Dollar/Dollar General deal, one has a merger to duopoly with the dominant player significantly larger than the closest competitor. Irrespective of whether that’s true, the 1,500-store divestiture offer may not fix that problem. In that circumstance, Family Dollar’s antitrust attorney, and therefore its board, could reasonably conclude that the 1,500-store divestiture offer simply doesn’t address that concern, and therefore Dollar General’s bid remains inferior.

The reality is Mr. Feinstein is likely right. Dollar General will most likely not have to give up 1,500 stores to get the deal done because competition is in fact robust in the dollar store space from many different channels, not just the brick-and-mortar dollar stores. But if Dollar General wants to dislodge Family Dollar from its position that Dollar Tree represents significantly less antitrust risk, it is going to have to foreclose the ability of Family Dollar’s board to rely on the antitrust arguments Family Dollar’s antitrust attorneys will surely make. Moreover, if Mr. Feinstein is right, the “hell or high water” clause will likely never become operative, and therefore should not carry serious risk for Dollar General.

But there is also another argument Family Dollar could make:  it has now filed HSR and has engaged in significant work with the FTC on the transaction. Starting all over again with Dollar General will represent a significant step backward in the defense of the transaction and therefore the timing and path to closing. Irrespective of what offer Dollar General ultimately comes up with, if Dollar General lets too much time lapse, the FTC will likely come to a conclusion about what needs to be done to preserve competition. Once it does that, the path to consummation with Dollar Tree becomes clear, and very little Dollar General could offer could change the board’s mind. This is why we suggested that Dollar General begin working now on the response to a second request, developing an actual divestiture plan, and locating a potential buyer. Family Dollar and Dollar Tree, likewise, should anticipate this move by Dollar General, and ramp up their own work. Indeed, as a part of their work, they may wish to analyze a combination of Family Dollar and Dollar General and have that paper ready to argue to the FTC why that combination is anticompetitive. That paper could be the basis for the Family Dollar board to conclude any deal with Dollar General is too risky as well as a mechanism to muck up any antitrust investigation that the FTC might initiate if Dollar General proceeds with a tender offer. (If Dollar General does make a tender offer for Family Dollar’s shares, it will be able to file HSR on the transaction without Family Dollar’s agreement.)

In parallel to these antitrust shenanigans, Dollar General has raised the prospect that the Family Dollar board, and in particular its chairman Howard Levine, is ignoring Dollar General’s bids because an acquisition by Dollar General would likely result in Mr. Levin losing his job. And by talking about a hostile bid, Dollar General may have triggered the board’s Revlon duties. 

Expect another rejection by Family Dollar. Whether Dollar General goes hostile as a next step isn’t clear because the “hell or high water” option is still available, but time is running out.