Unless you have been in the middle of a bidding war where antitrust concerns are front and center, what is playing out between Dollar General and Family Dollar is probably unfamiliar to you, as it is rarely seen outside of the boardroom.
To get you up to up to speed, back in July Family Dollar agreed to be acquired by Dollar Tree for $8.5 billion. Not wanting to be left on the sidelines, Dollar General upped the bidding by responding with an unsolicited offer of $8.95 billion. In a matter of days, Family Dollar rejected that offer “on the basis of antitrust regulatory considerations” even though Dollar General committed in its offer “to divest up to 700 retail stores in order to achieve the requisite antitrust approvals” and agreed “to fund the $305 million break-up fee” that Family Dollar would owe Dollar Tree if it terminated the Family Dollar/Dollar Tree merger agreement. Apparently, the 700 stores “is approximately the same percentage of the total combined stores represented by the 500 store divestiture commitment in the Dollar Tree merger agreement.” (A break-up fee is payable by the seller to the buyer where, for example, the seller terminates, because a better deal comes along.)
Dollar General has now upped the ante in a very public and detailed way. In a press release attaching a detailed letter to Family Dollar’s Board of Directors from Dollar General’s Chairman and CEO, Rick Dreiling, Dollar General makes its case for why a Dollar General/Family Dollar combination is doable. Not only has Dollar General upped its offer to $9.1 billion, but it also committed to divest up to 1,500 stores “if ordered by the Federal Trade Commission (“FTC”)” to clear the deal and, “as further evidence of its confidence in its ability to obtain antitrust approval,” Dollar General has “agreed to pay a $500 million reverse break-up fee to Family Dollar relating to antitrust matters.” (A reverse break-up fee is payable by the buyer to the seller where, for example, regulatory approvals are not given.)
Why does Dollar General believe so strongly that it can complete “the potential transaction [even] on the terms initially proposed”? According to Mr. Dreiling’s letter, Dollar General’s antitrust lawyers and expert economists have been conducting the same analyses they “would expect the [FTC] and its economists to perform.” This is why they have so much “confidence in [their] ability to complete the proposed transaction and that the 700 store divestiture commitment in [their] prior proposal provided more than sufficient cushion to the clear any FTC review.” To validate that belief, Dollar General has gone so far as to engage the former Director of the Bureau of Competition at the FTC to review that work. Mr. Dreiling’s letter also “concurs in [their] view that the transaction can be completed on the terms previously proposed.”
What has Dollar General gotten from all the work its antitrust lawyers and expert economists have been doing? According to Mr. Dreiling’s letter, Dollar General’s lawyers and experts believe that “the FTC will evaluate this transaction as involving a ‘fill-in’ shop/trip instead of a ‘destination’ or ‘stock-up’ shop/trip” merger, and not as “a traditional grocery store merger.” Down playing what Family Dollar’s own documents may say about that, Dollar General believes that its own data and “document will be much more important to the FTC.” Those documents and data are said to demonstrate, among other things, that: (1) Wal-Mart, not Family Dollar, is the primary driver regarding Dollar General’s strategic and pricing decisions; (2) approximately 75% of Dollar General’s SKUs are nationally priced (i.e., not subject to zone pricing); (3) Dollar General views that competitive market broadly, factoring in a wide variety of retail outlets, including mass, club, drug and grocery, as well as independent retailers, each of which acts as a competitive constraint on Dollar General’s pricing; (4) each of the above retail outlets sells the sort of items that Dollar General sells, and there is nothing unique about these products; (5) Dollar General is a fill-in shop/trip, not a destination or stock-up shop/trip; and (6) Dollar General’s customers are going to their primary destination stores weekly and have access to all of the same SKUs which are available for fill-in at Dollar General.
For its part, Family Dollar has confirmed that it has received Dollar General’s latest offer, stating that it “will review and consider the revised proposal” in “consultation with its legal and financial advisors.” Those are the same “legal and financial advisors” that, according to Mr. Dreiling’s letter, may be “analyzing this transaction as if it were a potential grocery store merger or utilizing data that tells a story much different than Dollar General’s documents and data.” Mr. Dreiling’s letter continues that Dollar General’s “enhanced proposal and commitments should sufficiently address any concerns that led [Family Dollar] to reject [Dollar General’s] prior proposal” and that the Family Dollar Board “should engage with us.” If not, Dollar General says that it “will consider taking [its] persuasive and superior proposal directly to [Family Dollar’s] shareholders.”
So, what’s up next for Dollar General and Family Dollar? The ball is in Family Dollar’s court to determine whether Dollar General is right regarding the deal’s prospects at the FTC given the most recent commitments. How all of this plays out may well depend on how Family Dollar’s own data and documents fit in and what weight they deserve in the overall analysis of the deal.
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