Thursday, September 11, 2014

Rejecting the Top Dollar

We’ve seen numerous multi-bidder deals this year.  (See, for example, Unique Synergies and theTyson Foods/Hillshire Merger.)  One of the more interesting is the current deal involving Family Dollar Stores.  Two bidders, Dollar General and Dollar Tree are seeking to own Family Dollar.  One of the bids (Dollar General) is clearly superior, yet management of Family Dollar favors the lessor bid of Dollar Tree.  One can wonder why.  (See Miriam Gottfried’s article in yesterday’s Wall Street Journal for additional details.)

 The Dollar Tree bid is valued at $74.50 a share.  The Dollar General bid is $80.   Advantage to shareholders: Dollar General.

Dollar Tree’s bid is 80% cash and 20% stock.  Dollar General’s bid is all cash.  Advantage to shareholders: Dollar General.

There is a breakup fee on Dollar Tree’s bid of $305 million agreed to by Family Dollar.  Dollar General said it would pay this.  Advantage to shareholders: Neutral.

Yet management of Family Dollar favors the Dollar Tree bid citing anti-trust concerns.  Are these valid?  True Dollar General and Family Dollar have similar business models, but there are other dominant competitors to the firms, namely Wal-Mart.  In addition, Dollar General has agreed to divest as many as 1500 stores in an attempt to head off any anti-trust issues. 

We have shown in our research that opposition by target management is the single biggest factor determining whether a deal goes through. So the opposition by Family Dollar clearly gives an advantage to Dollar Tree. The Dollar General bid is clearly superior from a shareholder’s point of view.  Management is supposed to represent the shareholders.  Management opposes the Dollar General bid.  Hmmm.  In view of the clearly superior bid by Dollar General, one must wonder at management’s own incentives and how (and why) they factor into the decision. 


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