Family Dollar Fate May Hinge on Decision by Billionaire Paulson

Dollar General Corp.’s $9.1 billion hostile bid for Family Dollar Stores Inc. may hinge on winning over an investor in both companies: Paulson & Co.

The hedge fund founded by billionaire John Paulson is the third-largest holder of Family Dollar stock, with 7 percent of the shares outstanding, and the biggest investor that hasn’t yet publicly taken a stance on the three-way takeover battle. Family Dollar’s two largest shareholders, which control a combined 15 percent of the company, are backing an $8.5 billion bid from Dollar Tree Inc., saying the lower offer has a better shot of being approved by antitrust regulators.

That leaves Paulson & Co., which also holds about 4 million shares of Dollar General, in a position to tip the scales. If Paulson supports the lower Dollar Tree bid, it would make it difficult for Dollar General to win over a majority of shareholders, said Noel Hebert, an analyst with Bloomberg Intelligence.

“If you get 22 percent on one side of the fence, it’s a pretty high hurdle for Dollar General to cross to win enough shareholders over,” Hebert said. “Winning over a majority of shareholders becomes substantially more difficult.”

Howard Levine, Family Dollar’s chief executive officer and the son of the discount chain’s founder, is the company’s largest shareholder with 9.3 million shares, or 8.2 percent outstanding, according to data compiled by Bloomberg. Trian Fund Management, an activist hedge fund with representation on Family Dollar’s board, is second with a 7.3 percent stake. Paulson & Co., which oversees about $23 billion in assets, didn’t have an immediate comment.

Mounting Tensions

Dollar General, spurned twice in its attempts to buy Family Dollar, announced yesterday that it was taking its latest, $80-a-share offer directly to shareholders. The hostile approach ratcheted up a bidding war that began after Dollar Tree announced its agreement to buy Matthews, North Carolina-based Family Dollar for $74.50 a share in July.

Dollar General has suggested that Family Dollar’s preference for the lower Dollar Tree deal stems in part from the fact that it would preserve a management role for Levine. Family Dollar, meanwhile, has maintained that the Dollar General transaction would face significant regulatory hurdles. Dollar General leads the market, and merging with Family Dollar would create a chain of almost 20,000 stores.

Dollar General, based in Goodlettsville, Tennessee, said yesterday that making a hostile bid would allow it to begin an antitrust review with the U.S. Federal Trade Commission, giving a sense of what its prospects are with regulators.

Some investors are taking gains in Family Dollar rather than waiting on the regulatory process. Ted Tawinganone, a Los Angeles-based vice president at TCW Group Inc., which oversees $141.6 billion of assets, said his firm bought Family Dollar shares as a long-term holding and wasn’t banking on a takeover. Now it’s planning to exit the position, he said in a phone interview.

“The Dollar General offer seems more appealing, but we’d rather take the sure thing than wait for what may or may not happen,” he said.