Dollar General's Family Dollar campaign said to hang on Wal-Mart
Wal-Mart Stores Inc. may be the deciding factor in whether two of its discount rivals can merge.
Family Dollar Stores Inc. says Dollar General Corp.'s proposal to buy the company will have a tough time getting past regulators. Dollar General, whose interest in Family Dollar has been rebuffed twice, has data showing that its buyers shop at a range of rivals, especially Wal-Mart.
As a result, Dollar General looks at a broader landscape of retail competition, not just Family Dollar, when setting its prices, people with knowledge of the matter said, asking not to be identified discussing private information. In fact, Dollar General could make a case that a combination of the two would prove a counterweight to the influence of the world's largest retailer.
Competition with Wal-Mart and other discounters will be a key argument before the U.S. Federal Trade Commission if Dollar General decides to make a tender offer to supersede Dollar Tree Inc.'s $8.5 billion bid for Family Dollar. The FTC will be trying to protect the low-income consumers who shop in discount stores.
“There are ways to get enough divestitures done to make the Dollar General deal feasible,” said Claudia Higgins, an antitrust lawyer at Kaye Scholer LLP in Washington, who isn't involved in the deal. “The best-case scenario for them would be that in most locations, Dollar General is setting its own prices based not only on Family Dollar and Dollar Tree, but also Wal- Mart and other stores.”
Representatives for Family Dollar and Dollar General declined to comment.
Family Dollar has spurned Dollar General's advances -- the latest a sweetened $9.1 billion bid -- citing antitrust hurdles and saying the lower office from Dollar Tree is more likely to win approval.
Top Perch
The takeover fight for Family Dollar began in July, when the company agreed to be acquired by Dollar Tree for $74.50 a share. That deal would merge the market's No. 2 and No. 3 companies, potentially unseating Dollar General as the leader.
Dollar General then stepped in with an unsolicited bid of $78.50 in August, aiming to maintain its perch atop the industry.
After that offer was rejected, Dollar General increased its proposal to $80 a share in cash. Along with the sweetened bid, Dollar General said it would sell as many as 1,500 locations to placate regulators, compared with 700 in its earlier offer. It also would pay Family Dollar $500 million if the deal failed to garner approval. Dollar General and Family Dollar together have more than 19,000 locations.
Family Dollar closed at $78.82 yesterday in New York, giving the Matthews, North Carolina-based company a market value of almost $9 billion.
Reduced Competition
Dollar General, which says it is committed to its latest offer, has facts on its side. Even in Southern states where Dollar General and Family Dollar aggressively go head to head, Bentonville, Arkansas-based Wal-Mart is a big competitor for both discounters, said Bryan Gildenberg, chief knowledge officer for London-based research firm Kantar Retail.
In the East South Central region, which Kantar defines as Alabama, Kentucky, Mississippi and Tennessee, 60 percent of regular Family Dollar shoppers also shop at Dollar General, indicating that losing one would reduce competition. However, close to 90 percent of those same Family Dollar shoppers say they go to Wal-Mart, according to study of shopper habits conducted by Kantar for the second quarter of this year.
Similarly, in the western South Central region, which includes Arkansas, Louisiana, Oklahoma and Texas, 49 percent of Family Dollar shoppers go to Goodlettsville, Tennessee-based Dollar General stores and 82 percent go to Wal-Mart, Gildenberg said in a phone interview.
Lower Prices
Family Dollar has shared data with the FTC as part of the agency's review of the Dollar Tree deal that shows prices are lower in its locations that are within a few miles of a Dollar General, according to a person familiar with the company who wasn't authorized to speak publicly. This happens because in those stores Family Dollar bases its prices solely on Dollar General's, regardless of the other chains in the area such as Wal-Mart, the person said.
This shows that competition with Dollar General reduces prices for Family Dollar's customers and the FTC will want to preserve that, the person said. There are far more than 1,500 stores where this is the case, the person said. Family Dollar has said more than 6,000 of its 8,200 locations are within 3 miles of a Dollar General.
Other Competitors
Although the antitrust risk for Family Dollar is less with a Dollar Tree deal, Dollar General might prevail if it could demonstrate that there are other competitors in their markets selling similar products and that the two companies look to them, and not just to each other, when setting prices, said Jonathan Klarfeld, an antitrust attorney at Ropes & Gray LLP in Washington and a former lawyer with the FTC.
“It's understandable they're taking that position and it's hard to know whether it's for purposes of getting a better offer out of Dollar General or because of legitimate concerns about a lengthy antitrust investigation,” Klarfeld said.
Countering Wal-Mart
Dollar General will be able to argue that, despite the close competition in key markets, a combination of the two discount retailers could counter Wal-Mart's influence, Gildenberg said.
“They can argue that a consolidated company would create a better shopping experience and a better alternative to Wal- Mart,” he said.
For Family Dollar, the company could point to Dollar General Chief Executive Officer Rick Dreiling's own words when showing that the competition between the two companies is stiff.
During an analyst presentation, Dreiling was asked about Wal-Mart's new, small Express stores and their impact on his business. He replied that Family Dollar is still a tougher competitor.
“In all honesty, the hit we've taken on those so far has actually been less than what happens when a Family Dollar opens up,” Dreiling said.