Dollar General enters race for Family Dollar with $8.95 billion bid
Family Dollar's shares rose 4.5 percent to $79.52 in early trading, above the offer price of $78.50 per share in cash.
Dollar General's shares were up 10.3 percent at $63.40, while Dollar Tree's shares were down 2 percent at $54.48.
Analysts said a bidding war was in the offing and Dollar General was likely to win.
"I think Dollar Tree would want to come back with something. Both Dollar General and Dollar Tree have some capacity to go a little bit higher with the offer price," Telsey Advisory Group analyst Joseph Feldman said.
Dollar General said the deal would create a retailer with nearly 20,000 stores in 46 U.S. states and sales exceeding $28 billion.
" ... We have a tremendous amount of strength in the rural communities and we have things to learn in the metro and Family Dollar is just the reverse," Chief Executive Rick Dreiling said on a conference call.
Family Dollar's presence is biggest in Texas and the eastern United States. Dollar General has over 1,000 stores in Texas. The two companies offer merchandise at multiple price points, while Dollar Tree offers items priced $1 or less.
Dollar General's offer, made in a letter to Family Dollar's board, represents a premium of 3.2 percent to Family Dollar's Friday close.
The enterprise value of the offer is $9.7 billion, higher than Dollar Tree's $9.2 billion.
Family Dollar, the No. 2 U.S. discount retailer, had 113.9 million shares outstanding as of July 5, according to its latest filing.
Billionaire investor Carl Icahn had pushed Family Dollar to sell itself to Dollar General. Dollar Tree offered last month to pay $74.50 per share in cash and stock.
Since then, Icahn has cut his stake in Family Dollar to 3.6 percent as of July 30 from 9.4 percent.
Competition in the dollar store industry has been intensifying, with Wal-Mart Stores Inc opening small-format stores to woo penny-pinching shoppers in a weak U.S. economy.
Dreiling, however, said Dollar General faced stiffer competition from Family Dollar than from Wal-Mart.
He also said antitrust approval for the deal was not a concern.
Dollar General said it was prepared to divest up to 700 retail stores to get regulatory approval for the deal. This is the same percentage that Dollar Tree had proposed.
Dreiling, who said in June he would retire next year, said on Monday he would stay on as CEO of the combined company through May 2016. He said he would not have announced his retirement had he known a deal between Family Dollar and Dollar Tree was under way.
Dollar Tree declined to comment.
Dollar General said a deal would add to its earnings in double-digit percentage terms in the first year after it closes.
The company said it expected annual synergies of $550 million-$600 million three years after the deal closes. Dollar Tree had said it expected $300 million in annual savings by 2018.
Dollar General has financing from Goldman Sachs and Citigroup Global Markets Inc for the deal, including a $305 million termination fee payable to Dollar Tree.