Family Dollar antitrust concerns supported by pricing study
Family Dollar Stores Inc., in rebuffing a $9.1 billion takeover by Dollar General Corp., has cited the antitrust hurdles a deal would face, arguing that the two discount chains compete heavily on price.
A survey of two Family Dollar stores in New Jersey would seem to back up that view. The study, conducted by Bloomberg Intelligence, found that prices were lower at a Family Dollar store that was near a Dollar General. The Family Dollar without a Dollar General in the vicinity charged more.
"There's definite antitrust risk," said Poonam Goyal, a senior retail analyst for Bloomberg Intelligence who oversaw the research.
While the pricing study was limited to one area, it adds to concerns that a merger of Family Dollar and Dollar General would encounter a long regulatory review. Family Dollar has used that rationale to snub Dollar General's advances three times: The board spurned two unsolicited bids and then today recommended rejecting a tender offer that was made directly to shareholders.
Family Dollar's board has recommended accepting a lower offer from Dollar Tree Inc. -- a transaction that's seen as an easier sell to the Federal Trade Commission because the chains don't compete as directly. Dollar General, in contrast, is the industry's largest retailer and uses a similar business model as Family Dollar. They both sell products at a range of price points, mostly to lower-income customers. Dollar Tree, meanwhile, serves middle-class shoppers and offers the novelty of selling most items at exactly $1.
Selling Stores
While Dollar General disagrees that its bid would get undue scrutiny from the FTC, it's willing to divest 1,500 locations if that helps placate regulators. The concession hasn't been enough to change Family Dollar's mind.
Family Dollar, based in Matthews, North Carolina, has said that it sets prices based on Dollar General competition, especially in cases when the two chains have stores near each other. That was evident in the Bloomberg Intelligence survey, which was conducted in Elizabeth and Avenel, New Jersey. At one location with a Dollar General about a mile away, prices for a basket of 90 identical items were 5.4 percent lower than a store without a nearby Dollar General.
Family Dollar has said that about 6,000 of its stores are within three miles of a Dollar General. That's four times as many as the 1,500 locations that Dollar General has offered to divest. Family Dollar has a total of more than 8,000 stores, while Dollar General has more than 11,000.
Wal-Mart's Role
The competition between the two chains has a bigger effect on prices than the presence of Wal-Mart Stores Inc., Family Dollar has said. If the FTC agrees, that may derail such a deal, the company has said.
For its part, Dollar General has said that its pricing is based on several retailers -- including Wal-Mart -- rather than just Family Dollar. Family Dollar declined to comment on the pricing survey, while Dollar General didn't immediately respond to a request for comment.
The Dollar Tree deal has been in FTC review since Family Dollar agreed to be acquired for $8.5 billion, or $74.50 a share, in July. The companies received a second request for information from the FTC earlier this month.
Dollar General's bid of $80 a share will also undergo FTC scrutiny, now that the company has taken its proposal to shareholders in the form of a tender offer. Family Dollar said today that the tender offer is "illusory," since it will have to overcome so many hurdles before investors get their money.
The FTC will collect raw pricing data from all three chains and conduct its own analysis store by store, instead of relying on what the chains say, said Mike Keeley, an antitrust lawyer for Axinn, Veltrop & Harkrider LLP in Washington who has worked on retail deals that received FTC approval.
An acquirer can bolster its case by showing that its prices are lower than those of the takeover target, Keeley said. That was true in the pricing study. Dollar General's prices were lower by an average of 5.8 percent, Bloomberg Intelligence found.
FTC has blocked retail deals in the past over pricing concerns. The agency stopped Staples Inc. from buying Office Depot Inc. in 1997 because the combined company would be able to control prices.
"The fact is that in those communities where Staples faces competition from Office Depot, prices are significantly lower than where it does not," the FTC said in a statement at the time. "Therefore, if this merger is allowed to proceed, in those areas, competition will be reduced or eliminated and consumers will pay higher prices."
Times may have changed since then, though. After Staples was rejected, the FTC has been reluctant to block retail transactions and has rarely asked for store divestitures. Last year, the agency approved Office Depot merging with OfficeMax. It cited increased competition from Wal-Mart and Target Corp., as well of plenty of choices online.