(Reuters) – Dollar General Corp (DG.N) offered to buy Family Dollar Stores Inc (FDO.N) for $8.95 billion, trumping an offer by Dollar Tree Inc (DLTR.O), to strengthen its position as the No. 1 U.S. discount retailer.
The offer of $78.50 per share in cash represents a premium of 3.2 percent to Family Dollar’s Friday close. Family Dollar had 113.9 million shares outstanding as of July 5, according to its latest filing.
Family Dollar’s shares were trading at $79.76 before the bell, above the offer price. Dollar General’s shares were up 11 percent at $63.64.
“I think Dollar Tree would want to come back with something. Both Dollar General and Dollar Tree have some capacity to go a little bit higher with the offer price,” Telsey Advisory Group analyst Joseph Feldman said.
Dollar General made the offer, at an enterprise value of $9.7 billion, in a letter to Family Dollar’s board on Monday.
Dollar Tree offered last month to pay $8.5 billion, or $74.50 per share in cash and stock, representing an enterprise value of about $9.2 billion.
Billionaire investor Carl Icahn had pushed Family Dollar, the No. 2 U.S. discount retailer, to sell itself to Dollar General. Icahn has been cutting his stake in Family Dollar since Dollar Tree made the offer.
Dollar General Chief Executive Rick Dreiling said he would stay on as CEO of the combined company through May 2016. Dollar General said in June Dreiling would retire next year.
Dollar stores have struggled in a weak U.S. economy as Wal-Mart Stores Inc (WMT.N: Quote, Profile, Research, Stock Buzz) and other large retailers chase penny-pinching consumers by offering more items priced at $1 or less.
Family Dollar’s presence is biggest in Texas and the eastern United States. Dollar General has over 1,000 stores in Texas.
The similarity in store base will give the merged company more negotiating power with vendors, Feldman said.
Dollar General said a deal would create a retailer with nearly 20,000 stores in 46 U.S. states and sales exceeding $28 billion.
Dollar General and Family Dollar offer general merchandise at multiple price points, while Dollar Tree offers items priced $1 or less.
Dollar General said a deal would add to its earnings in double-digit percentage terms in the first year after it closes.
The company said it expected annual synergies of $550 million-$600 million three years after the deal closes. Dollar Tree had said it expected $300 million in annual savings by 2018.
Dollar General also said it was prepared to divest up to 700 retail stores to get regulatory approval for the deal. This is the same percentage that Dollar Tree had proposed.
Dollar General said it had financing from Goldman Sachs and Citigroup Global Markets Inc for the deal, including a $305 million termination fee payable to Dollar Tree.