On Friday, September 5, 2014, Family Dollar issued a press release that effectively foreclosed a friendly deal with Dollar General. On Wednesday, September 10, 2014, Dollar General said it would initiate a cash tender offer for Family Dollar. Dollar General has gone hostile. (See our previous blog on this matter.)
In Family Dollar’s release, Family Dollar outlines the reasons why a deal with Dollar General would raise more antitrust issues than a deal with Dollar Tree. These reasons include:
- Family Dollar and Dollar Tree are deeply involved in an FTC investigation.
- Family Dollar and Dollar General compete in far more than 1500 local geographic areas, the limit of the number of stores Dollar General would divest to close the deal.
- Family Dollar and Dollar General price aggressively where they do compete, and less so where they do not, suggesting that they are in fact close substitutes. Dollar General’s CEO has made statements to this effect publicly.
- The FTC would need to review over 20,000 local geographic markets, more than it has ever reviewed.
In effect, Family Dollar’s antitrust lawyers disagree with Dollar General’s antitrust lawyers, and the Family Dollar board has decided to believe their own counsel. Dollar General could not make any argument that would conclusively refute these assertions and thereby force the Family Dollar board to go with Dollar General.
Dollar General’s only recourse was the tender offer. The tender offer allows Dollar General to file notification and trigger an antitrust review of its own deal, independent of what Family Dollar may or may not do. It allows, or really forces, the FTC to focus on the Family Dollar/Dollar General transaction even to the exclusion of the Family Dollar/Dollar Tree transaction because of the unique timing issues under HSR associated with tender offers. It also eliminates a lot of the antitrust deal risk Dollar General wanted to avoid as suggested by their comments on the hell-or-high-water clause.
Under the HSR rules, the initial waiting period attributable to a cash tender offer expires 10 days after the offeree files notification. Usually, both parties must file to trigger the waiting period. If the initial waiting period has been extended (through a second request), the second waiting period expires 10 days after the offeree submits its documentary and informational response. Again, usually, both parties must submit their response to the second request to trigger the waiting period. Under the terms of Dollar General’s tender offer, however, Dollar General expressly states that they will be “opting” for the normal 30-day periods. This statement is designed to signal to the FTC that Dollar General does not intend to “jam” them with documents and information—that Dollar General wants to work cooperatively with the FTC. This cooperation is designed to compensate for the fact that Family Dollar will not be cooperating with Dollar General to defend that transaction. That lack of cooperation from Family Dollar could be quite problematic. A more friendly FTC could signal issues in such a way that Dollar General would be able to respond properly even without Family Dollar’s cooperation.
I doubt that Dollar General would opt out of the offeree-only filing triggers. That would cede too much power to Family Dollar. Then, all Family Dollar would need to do to kill off the tender would be to drag its feet in responding to a second request. Note that under the HSR rules, Family Dollar is required to file notification and respond to the second request within certain times of when Dollar General files. The timing just doesn’t trigger off their submissions as it normally does.
Interestingly, Dollar General suggests that it is still willing to divest up to “1,500 stores if required by the FTC and to pay Family Dollar a $500 million reverse break-up.” The fact is, this offer is largely for show. Dollar General’s tender is subject to Section 251(h) of the General Corporation Law of the State of Delaware. Section 251(h) of the DGCL allows a buyer, following consummation of a tender offer, to effect a second-step merger without a vote of the shareholders. The tender would need to result in the buyer holding enough shares to approve the merger under Delaware law and the target’s certificate of incorporation. The HSR Act prohibits the consummation of the tender until the applicable waiting periods have expired. The second-stage merger can only occur after the consummation of the tender. But the tender can only be consummated once HSR has cleared. It’s therefore irrelevant whether the second-stage definitive merger agreement contains any antitrust concessions whatsoever.
One might argue that the FTC could demand significant divestitures from Dollar General as condition to approving the deal, more than Dollar General wants. Since there is no “out” under the tender for such a demand, other than the MAC clause, Dollar General could be obliged to take the larger package. Moreover, since Dollar General does not have access to the Family Dollar’s data, Dollar General could not reasonably defend the package the FTC demands and would be at an even greater disadvantage. Dollar General is protected, however, by virtue of the timing of the tender offer. So long as HSR approval is pending, it does not have to nor can it legally consummate the tender. If the FTC asked for too many stores, Dollar General could just let the tender expire. Indeed, the FTC could demand divestitures of, say, only 100 stores. If Dollar General didn’t like that number, Dollar General could simply fail to comply with HSR and let the tender expire. Since the HSR condition had not been met, Dollar General would be able to withdraw the offer and return the tendered shares without recourse from the shareholders.
At first blush, not having Family Dollar’s cooperation in the antitrust investigation could result in the FTC demanding significantly more from Dollar General in order to “approve” the transaction. In reality, Dollar General can end the process at any time prior to HSR compliance simply by allowing the tender to expire. Through the use of the tender offer process, Dollar General has in effect eliminated the need to give Family Dollar any antitrust contingency or breakup fee.
Family Dollar is not without recourse, of course. If the shares have not been accepted for payment by November 8, 2014, the shareholders can withdraw their shares. Family Dollar can actively attack the Dollar General acquisition during this time. While I think the Dollar General second request will go on far longer than November 8, 2014, in any event, the longer the inevitably public delay, the more likely shareholders will want to withdraw their shares. Whether a material number of Family Dollar shareholders will do so is another question. Dollar Tree should be thinking about its own response to the tender offer, perhaps one of its own….