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Econ Focus

Second Quarter 2014

Upfront

In for a Dollar

Discount Stores Engage in a High-Price Bidding War

The Charlotte area-based retailer Family Dollar has been targeted for takeover by two of its com­petitors. In July, the company announced it was being acquired by Dollar Tree, which is headquartered in Chesapeake, Va., for $8.5 billion, or $74.50 per share. In August, rival Dollar General offered to pay $78.50 per share, an offer that Family Dollar's board of direc­tors rejected on the grounds that the Federal Trade Commission (FTC) would be unlikely to approve the deal. Dollar General upped its bid to $80 per share, or $9.1 billion, but Family Dollar spurned that offer as well. On Sept. 10, five days after being rebuffed the second time, Dollar General launched a hostile take­over bid. Family Dollar's board is recommending that shareholders reject Dollar General's tender offer. The shareholder vote is scheduled for December 11.

The three chains are the major players in the "super discount" retail sector, which grew significantly during the Great Recession and has continued to expand. Dollar General is the largest of the three, with more than 11,000 stores in 40 states. Family Dollar has about 8,000 locations, and Dollar Tree has about 5,000 loca­tions in the United States and Canada. By comparison, Wal-Mart has around 4,200 U.S. locations.

Despite the moniker "dollar store," both Family Dollar and Dollar General sell goods at a range of prices, and Family Dollar says that proximity to a Dollar General is a major factor in its pricing decisions. According to Family Dollar's board of directors, it's thus likely the FTC would block the deal on antitrust grounds, or at the very least require a protracted review process. "The government wants to prevent mergers that transform the structure of a market in a way that raises prices and thus injures consumers in that mar­ket," says Alan Meese, an antitrust expert at William & Mary Law School and former antitrust litigator.

Invoking antitrust concerns is a common tactic for companies that don't want to be bought, according to Meese. "Raising antitrust concerns to thwart a more generous bid can raise suspicions about the motives of the target's board." Still, the Dollar Tree deal may be more likely to pass muster with the FTC; Dollar Tree caps its prices at $1 and has promised to divest itself of as many stores as necessary to win regulatory approval. Dollar General has agreed to sell up to 1,500 stores, but so far it is unwilling to promise more. "In this context Family Dollar's directors have a fiduciary duty to obtain the best deal for shareholders," says Meese. "If they have a well-informed good faith belief that the FTC will block the more lucrative transaction, they should recommend shareholders approve the sure thing."

Just how much monopoly power a combined Dollar General-Family Dollar would actually be able to exer­cise depends on how the relevant market is defined. The dollar stores' $48 billion market is only a tiny slice of the total market for fast-moving consumer goods, such as groceries and toiletries; Walmart's U.S. sales alone were more than $279 billion in fiscal year 2014. And an analysis of shopping data for about 80,000 households by the company InfoScout suggests that consumers have plenty of other options. In any given month, nearly 93 percent of households also shopped at a supercenter such as Walmart or Target, and when asked, 81 percent of Family Dollar shoppers said Walmart was a good substitute for Family Dollar.

Regardless of which company ultimately wins over Family Dollar's shareholders, the deal will come under close FTC scrutiny to ensure that consumers can stretch their dollars as far as they did before.

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David A. Price (804) 697-8018