Family Dollar spurns Dollar General bid on antitrust concerns

(Reuters) - Family Dollar Stores Inc rejected a $9 billion buyout offer from Dollar General Corp and issued a sharp rebuke to accusations its CEO favors a smaller bid from Dollar Tree Inc because it would allow him to keep his job.

Family Dollar, the second-largest dollar store in the United States, said it believed a deal with its larger rival would be unlikely to win antitrust approval despite a promise by Dollar General to close up to 700 stores.

"We will not jeopardize the Dollar Tree deal for a transaction with Dollar General that has a high likelihood of not closing due to antitrust considerations," said Ed Garden, an independent director on Family Dollar's board.

The formal rejection came a day after Dollar General Chief Executive Rick Dreiling questioned whether his counterpart at Family Dollar, Howard Levine, was serving his own interests in supporting Dollar Tree's $8.5 billion offer.

Levine responded on Thursday by saying that Dreiling's letter "contained blatant mischaracterizations and did nothing to address the antitrust issues in Dollar General's proposal."

Dollar stores have been a popular choice for U.S. consumers in a weak economy. Competition to woo penny-pinching customers has intensified, particularly as Wal-Mart Stores Inc has opened more small-format stores.

The U.S. market for dollar stores grew 46 percent to $48.2 billion between 2008 and 2013 and is expected to grow 18 percent in the next five years, according to Euromonitor International.

A combined Dollar General-Family Dollar would have nearly 20,000 stores across 46 U.S. states and annual sales in excess of $28 billion.

Dollar Tree and Family Dollar combined would have 13,000 stores across the United States and Canada and $18 billion in annual sales - enough to vault it ahead of Dollar General as the biggest discount retailer in North America.

Rahul Sharma, managing director of investment advisory Neev Capital, said antitrust issues were not insurmountable given the much bigger size of retailers such as Wal-Mart and Kroger Co , which also cater to low- and middle-income consumers.

Combined, the three dollar chains' annual sales total about $35 billion ? less than a tenth of Wal-Mart's $473 billion.

"It is not clear to us why the antitrust concerns could not be resolved via methods such as store divestitures," said S&P Capital IQ analyst Efraim Levy. "It might be that antitrust was not the full reason."

'UNFRIENDLY'

Certainly, the Dollar Tree cash-and-stock bid is friendlier to Family Dollar's management. Levine, son of Family Dollar's founder, would remain CEO of the Matthews, North Carolina-based company were it to be bought by Dollar Tree.

Were Dollar General to buy Family Dollar, Levine is expected to lose his job, although this has not been confirmed.

"The Dollar General offer, while it clearly makes sense in the form of synergies, was unfriendly to Family Dollar," said Joan Storms, retail analyst at Wedbush Securities Inc.

Activist investor Carl Icahn, who has whittled down his stake in Family Dollar to 3.6 percent as of July 30 after buying 9.4 percent, has also questioned whether Levine's future could have influenced the decision to go with Dollar Tree. [ID:nL2N0QP0OK]

Dreiling, in his letter late on Wednesday, alleged that he had been led astray by Levine in talks on a potential buyout during a meeting on June 19. In response, Family Dollar said representatives of Dollar General "stated that they were not interested in pursuing a strategic transaction at that time."

Shares of Dollar General were down 0.4 percent at $63.53 in noon trading. Family Dollar's shares were down 0.3 percent at $79.54.

Shares of Dollar Tree, which also reported a 2.6 percent fall in quarterly profit on Thursday as its costs rose, were down 1.1 percent at $54.38. [ID:nL4N0QQ4SM]

(Editing by Savio D'Souza, Kirti Pandey and Robin Paxton)