Dollar General Corp (DG.N) raised its bid for Family Dollar Stores Inc (FDO.N) to $9.1 billion, and warned it may turn hostile and appeal directly to shareholders if the new offer was rejected.
The No.1 U.S. deep-discount retailer also said it would pay a break-up fee of $500 million if the deal ran foul of competition law, the reason Family Dollar had cited for its rejection of the earlier $8.95 billion offer.
Family Dollar opted instead for an $8.5 billion cash-and-stock bid from Dollar Tree Inc (DLTR.O).
Family Dollar said on Tuesday its board would review Dollar General's new offer and that it was sticking with its deal with Dollar Tree.
Dollar General's 2 percent higher offer is "more than good enough" and there is no excuse for Family Dollar to not open its books to its larger rival, said Rahul Sharma, managing director of investment advisory Neev Capital.
Family Dollar's shares were up half a percent at $80.54 in early trading on Tuesday, slightly above Dollar General's offer of $80 per share, suggesting some investors held hopes of higher offers.
The fight for Family Dollar comes at a times when dollar chains are struggling with minimal or no gross margin growth as they try to keep lower-income shoppers from being lured by Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).
Wal-Mart is doubling down on small-format stores, typically one quarter the size of its supercenters, a move that could result in increased competition for the dollar stores.
Wolfe Research said in a note that the best outcome for all parties was for Dollar General to merge with Family Dollar as it would be the best placed to compete with Wal-Mart.
"A levered Dollar Tree/Family Dollar with a standalone Dollar General is likely to embolden Wal-Mart to further accelerate its small-box plans, leading to additional market share gains and diminished consumer choice," Wolfe Research analysts said.
ANTITRUST CLEARANCE
Dollar General also said it was willing to sell up to 1,500 stores to clear the antitrust review, up from the 700 it had proposed earlier.
The company said it hired Richard Feinstein, a former director of the Bureau of Competition at the Federal Trade Commission, to further "validate its antitrust analysis".
Playing down antitrust concerns, Dollar General said its documents would show that the products it offered were not unique as they were also available at most mass retailers, drug and grocery stores.
It also said that Wal-Mart, and not Family Dollar, was the primary driver for the company's pricing decisions.
Dollar General and Family Dollar offer goods at multiple price points, while Dollar Tree sticks to a $1 or less format.
The Dollar Tree bid is friendlier to Family Dollar's management.
Family Dollar Chief Executive Howard Levine, son of the founder of the Matthews, North Carolina company, would remain CEO of that subsidiary if it was bought by Dollar Tree.
If Dollar General succeeds in buying Family Dollar, Levine is widely expected to lose his job, although this has not been confirmed.
Dollar General's shares were up 1.2 percent at $64.69.
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