The battle for Family Dollar Stores Inc. escalated on Tuesday, as Dollar General Corp. DG -0.33% raised its bid for the second-biggest U.S. dollar-retail chain to $80 a share and took steps to help allay antitrust concerns.
As part of the sweetened all-cash bid, up from a prior offer of $78.50 a share, Dollar General increased the number of stores it would be willing to divest itself of to 1,500 if ordered by federal antitrust regulators.
Dollar General, the nation's biggest dollar-retail chain, also said it agreed to pay a $500 million reverse breakup fee to Family Dollar if antitrust issues scuttle a deal.
A representative for Family Dollar didn't immediately respond to a request for comment.
"We are confident that our enhanced proposal sufficiently addresses any concerns that led Family Dollar's board of directors to reject our prior proposal without any discussions between our companies," said Dollar General Chief Executive Rick Dreiling, adding that the company will consider taking its latest proposal directly to Family Dollar shareholders depending on the board's response.
Family Dollar rejected Dollar General's roughly $9 billion takeover offer last month. Dollar General made its unsolicited bid after Family Dollar reached a deal to be acquired by Dollar Tree Inc. DLTR -0.60% for $8.5 billion in cash and stock.
Family Dollar, in reaffirming its deal with No. 3 chain Dollar Tree, cited antitrust concerns when it rebuffed Dollar General's approach. Dollar General, for its part, has said its antitrust analysis showed the deal could be completed.
Antitrust concerns are the main issue in bringing together the largest two players in the small-sized discount stores. Dollar General had originally proposed divesting itself of up to 700 stores in its bid for Family Dollar, but both sides have been analyzing whether that would be enough to get the blessing of the Federal Trade Commission.
That question, according to antitrust experts, may very well boil down to whether the chains look to each other or a bigger rival like Wal-Mart Stores Inc. WMT -0.53% when setting prices.
One fear from the Family Dollar side is over an FTC test that would assess whether the retailers are more aggressive with prices in areas where their stores are nearby, compared with locations farther apart. If the agency finds that to be the case, they could force more store divestitures, or quash the deal altogether, over worries the merger would lead to higher prices for consumers.
Dollar General and some Wall Street analysts have said they believe the antitrust concerns are overblown. That is because Dollar General sets the prices for a "vast majority" of its items on a national basis, according to a person familiar with the matter. The strategy means that a box of Oreo cookies or a bottle of Tide detergent sells for the same price in Springfield, Mass., as in Albuquerque, N.M., regardless of its proximity to a Family Dollar store.
On Tuesday, Dollar General said that since making its initial bid for Family Dollar last month, it has further refined its antitrust analysis with its counsel and its economist, adding that this analysis has solidified the company's confidence in its ability to complete the potential deal on the terms initially proposed.
The battle for Family Dollar comes amid a prolonged slump for households at the lowest income levels, showing the need for consolidation in the dollar-store sector, analysts say, as the companies grapple with how to squeeze more costs out of their operations to sustain low prices.
Dollar General's same-store sales growth, for instance, has dropped to an average 1.6% over the past three quarters from an average 6.5% over the preceding 23, Sterne Agee analyst Charles Grom said recently.
