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Dollar General Outbids Dollar Tree For Family Dollar

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Dollar General has made a proposal to acquire Family Dollar Stores in a transaction valued at $9.7 billion. Dollar General’s all-cash proposal of $78.50 per share is higher than the $74.50 per share in cash and stock that Dollar Tree offered July 28 in its bid to merge with Family Dollar.

Dollar General said the merger would position it as the largest small-box discount retailer in the U.S. with nearly 20,000 stores in 46 states and sales of more than $28 billion.

“For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares,” said Dollar General Chairman and CEO Rick Dreiling. “For Dollar General shareholders, the proposed combination of Dollar General and Family Dollar would be a significant strategic opportunity to create immediate and lasting shareholder value. For both Dollar General and Family Dollar customers, we would be able to provide better value and greater selection.

“We have the utmost respect for Family Dollar, its leadership and its employees,” Dreiling said. “We look forward to expeditiously entering into constructive discussions with Family Dollar in order to sign a definitive merger agreement that provides enhanced value to Family Dollar shareholders and enables Dollar General to realize the benefits of this combination.”

Dreiling said in a letter to Family Dollar Chairman and CEO Howard Levine that Dollar General was “surprised and disappointed” when it found out about the merger agreement with Dollar Tree. He said Dollar General would fund the $305 million break-up fee Family Dollar may have to pay to Dollar Tree upon termination of their agreement.

Tennessee-based Dollar General outlined several strategic benefits of its proposed merger:

• Complementary business models. The business models and product mixes of Dollar General and Family Dollar are highly complementary. Dollar General said that, given how it improved its own profitability since 2008, there is opportunity to more efficiently and effectively manage the Family Dollar portfolio.

• Clear operational synergies and integration plan. The proposed transaction would be expected to generate synergies of $550 million to $600 million on an annual run-rate three years post-closing derived from sales growth driven by an improved merchandise offering and store presentation, purchasing and sourcing efficiencies, distribution and transportation optimization and administrative savings, Dollar General said.

• Tenured management team with a proven track record. Dreiling, who led the management team at Dollar General starting in 2008, has agreed to postpone his previously-announced retirement and remain in the role of chairman and CEO of the combined company until May 2016, if a merger agreement is signed, in order to oversee the integration of the two companies. Beyond that date, Dreiling has also agreed that, if asked by the board and elected by shareholders, he would remain as a board member and would be willing to serve as chairman.

• Significant earnings accretion through synergies. The proposed transaction would be low double-digit accretive on a percentage basis to earnings in the first full year excluding implementation and transaction costs. The combined company would continue to generate significant cash flow and would be expected to return to investment grade ratios within approximately three years from the closing of the proposed transaction.

Transaction details: Dollar General prepared to divest 700 stores

The proposed transaction values Family Dollar at an enterprise value of approximately $9.7 billion, and it represents an enterprise value to EBITDA (for the last 12 months ending May 31) multiple of 11.6x. The proposal has the unanimous approval of the board of directors of Dollar General.

Goldman Sachs and Citigroup Global Markets Inc. have agreed to provide committed financing  to consummate the transaction, including estimated fees and expenses, such as the $305 million termination fee payable to Dollar Tree in the event Family Dollar terminates the existing agreement to enter into a merger with Dollar General.

Dollar General said it has undertaken significant economic and antitrust analysis and is confident it can quickly and effectively address any potential antitrust issues. Dollar General is prepared to divest up to 700 retail stores in order to achieve the requisite approvals, which is approximately the same percentage of the total combined stores represented by the 500 U.S. store divestiture commitment in the Dollar Tree merger agreement.

Dollar General said it is prepared to enter into a definitive merger agreement that would be substantially similar to the one entered into between Dollar Tree and Family Dollar, modified as necessary to accommodate Dollar General’s all-cash proposal, antitrust matters and to provide a time period to close the proposed transaction consistent with that set forth in the existing agreement.

In addition, Dollar General is prepared to revise the agreement to permit Family Dollar to continue to pay its regular quarterly cash dividend through closing on terms consistent with past practice.

Goldman, Sachs & Co. is acting as financial advisor to Dollar General and Simpson Thacher & Bartlett LLP is acting as its legal counsel.

About the author

Terrie Ellerbee

Terrie was Associate Editor at The Shelby Report.

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