Dollar General Says It Was Misled During Family Dollar Talks

Dollar General Corp., which made a bid this week to buy Family Dollar Stores Inc. for about $9 billion, complained to the takeover target’s board that it was given a false impression during earlier talks with the company.

Dollar General held a meeting with the rival discount chain in June and expressed interest in an acquisition, days before Family Dollar entered exclusive negotiations with another party, Dollar Tree Inc., according to a letter yesterday to the board by Dollar General Chief Executive Officer Rick Dreiling. Those negotiations culminated in Dollar Tree agreeing to buy Family Dollar for $8.5 billion last month.

Dollar General was given no sign by Family Dollar CEO Howard Levine that a deal with another buyer was imminent, according to Dreiling. So the company didn’t proceed with an offer for Family Dollar until after it learned of the Dollar Tree deal, forcing it to make a higher bid that includes paying a breakup fee to its rival suitor.

“At no time during this meeting did Mr. Levine indicate that there was a process, that there was any urgency to act or that there were discussions with another potential buyer,” Dreiling said. “In fact, Mr. Levine’s response to specific questions posed by our representatives gave us quite the opposite impression. Had we left the meeting with the belief that a sale of Family Dollar was imminent, we assure you that our course of action would have been different.”

Management Role

During the talks, Levine had discussed his wish to be CEO of the combined company, Dreiling said. That desire to maintain a management role may have weighed in his decision to proceed with Dollar Tree instead, he said. Under the terms of the Dollar Tree agreement, Levine would stay on as Family Dollar’s CEO. He would still report to Dollar Tree’s CEO, though.

“Regrettably, as a result, we are now forced to factor a $305 million breakup fee into our offer -- consideration that could have been better used to maximize value for the Family Dollar shareholders,” Dreiling said.

An outside spokeswoman for Matthews, North Carolina-based Family Dollar declined to comment.

Once a company decides to sell itself, the board has a duty to seek the highest price, said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. The CEO’s preference shouldn’t be an issue, he said.

Staying on Top

“The Dollar General letter’s implications are dangerous to the Family Dollar board,” Gordon said. “Even if it goes with the Dollar General offer, the breakup fee money that would go to Dollar Tree instead of to Family Dollar’s stockholders could end up being the responsibility of the board.”

Dollar General surged 12 percent on Aug. 18, after announcing its offer, setting off a bidding war. The shares rose 0.3 percent to $63.76 yesterday.

Family Dollar rose 0.1 percent to $79.81 while Dollar Tree advanced 0.5 percent to $55.

Dollar General, based in Goodlettsville, Tennessee, needs the Family Dollar deal to maintain its lead in the industry. If its two rivals combine instead, the merger would create the largest U.S. dollar-store chain and intensify competition for Dollar General at a time when Wal-Mart Stores Inc. is expanding into neighborhood discount stores.

In his letter, Dollar General’s CEO also assured the Family Dollar board that his bid could pass antitrust hurdles. The combined company would be prepared to sell as many as 700 stores to gain regulatory approval, Dollar General said when making its offer earlier this week.

“We believe that the number of store divestitures contained in our offer letter is more than sufficient to take this issue completely off the table,” Dreiling said. “We remain ready to share with your counsel the conclusions of our extensive antitrust work once you have taken the appropriate steps under your existing merger agreement with Dollar Tree to enable us to begin discussions.”

Activist Investors

Family Dollar is concerned that the Dollar General offer presents major antitrust concerns, which may force the combined company to divest more than 700 stores, according to a person with knowledge of the situation. Family Dollar wants Dollar General to agree to take on those risks before it will accept any deal with the company, said the person, who asked not to be identified because the deliberations are private. That may involve paying a fee to Family Dollar if regulators block the deal, according to the person.

The battle for Family Dollar began after activist investors Carl Icahn and Nelson Peltz took large stakes in the retailer and then pushed for a sale. Icahn still owns about 3.6 percent of the shares, while Peltz’s Trian Fund Management LP has a 7.3 percent stake.

On his blog this week, Icahn also suggested that Levine’s management role promised by the Dollar Tree deal may have kept him from trying to entice other bidders.

“It seems obvious that in a Dollar General/Family Dollar merger, Levine would not have any future role,” Icahn said.

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