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Family Dollar Stores Inc. (FDO - Analyst Report) rejected the $9.7 billion bid by its rival Dollar General Corporation (DG - Analyst Report) citing difficulty to win over antitrust regulatory concerns and has decided to stick with Dollar Tree Inc. (DLTR - Analyst Report).

Dollar General has expressed disappointment over failure of the deal, stating that the company has already done extensive research and was confident of satisfying the antitrust concerns. Moreover, Rick Dreiling, CEO of Dollar General, has accused Family Dollar CEO Howard Levine of protecting his vested interests by tying up with Dollar Tree even as Dollar General’s bid was financially superior to Dollar Tree’s.

Dollar General had offered $9.7 billion for the buyout as against Dollar Tree’s $9.2 billion bid and was willing to pay the $305 million break-up fee that it would owe Dollar Tree if the deal was broken off.

A giant  in the small-box discount retail space would have been created from the merger of Dollar General and Family Dollar, throwing serious competition to retail giants like Wal-Mart Stores Inc. (WMT - Analyst Report). The combined company could have operated close to 20,000 stores in 46 states. Dollar General expected revenues to hit $28 billion and for the deal to generate synergies of $550 million to $600 million on an annual rate three years after the deal closed.  

In contrast, Dollar Tree and Family Dollar Union will create 13,000 stores in 48 states with combined sales of roughly $18 billion.

Nevertheless, for Family Dollar, which has been troubled for some time now, the Dollar Tree deal will be a much needed breath of fresh air. The tepid economic recovery and heightened competition from other big brick and mortar retailers along with online giants has affected its profitability. In the recently concluded quarter, the company saw its earnings per share declining 19% year over year. Billionaire investor Carl Icahn, holding a 3.6% stake in Matthews, NC-based Family Dollar, had long been pushing for the sale of the company.

The acquisition will enhance the buying power of the pair, providing better negotiating terms against suppliers. The combined company will be able to offer broader and multiple assortments at more compelling prices. Moreover, the transaction will help in achieving operational and distributional efficiencies as well as cost synergies. Dollar Store anticipates savings of $300 million in annual costs by the end of the third year, after the deal is closed.

Post acquisition, the companies will be able to tap new markets, enhance market share in existing ones, extend the sales channel and generate significant free cash flow to increase store count and repay debt.

Currently, both Family Dollar and Dollar Tree carry a Zacks Rank #3 (Hold).

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