Dreiling 'confident' DG bid will prevail

Dollar General doesn’t intend to take “no” for an answer.

Officials of the Goodlettsville, Tenn.-based discounter say they remain convinced they have a superior offer to acquire Family Dollar than does Dollar Tree, despite seeing their initial offer rejected.

Richard Dreiling, CEO of Dollar General, in a conference call Thursday said the retailer was carefully reviewing its options, “and we truly hope that Family Dollar will come to the table to explore a tremendous opportunity for maximizing value for its shareholders.” He later added, “I’m very optimistic of where this is going to go.”

As reported previously, Family Dollar’s board of directors rejected a $9.2 billion takeover from Dollar General, saying it would stick with Dollar Tree’s previously made $8.5 billion offer, citing antitrust concerns. The rejection set off a frosty exchange between Dollar General and Family Dollar, with Dreiling suggesting that Family Dollar CEO Howard Levine had personal reasons to prefer the former offer, while Levine blasted Dreiling for “blatant mischaracterizations” of discussions they had.

Dollar General’s takeover offer — which would create a 20,000-store small discounter — contemplated some 700 store divestitures to meet antitrust issues.

“While much has been said about the antitrust issues, we remain confident that these issues are very manageable,” Dreiling said.

Analysts have suggested that Dollar General could revise its offer to include a “reverse termination fee” — that is, assuming the financial risk if the business combination were to fall through due to antitrust concerns. Scott Mushkin, an analyst for Wolfe Research, in a note to clients said this would be “an easy way to appease the FDO board.”

Mushkin added that Wolfe’s analysis suggests that antitrust risk from Family Dollar’s perspective is likely “overstated.”

Neither Family Dollar nor Dollar Tree responded to Dollar General’s most recent comments, and Dreiling beyond a statement reiterating interest in the merger and a review of its potential benefits did not take additional questions.

His remarks came as Dollar General reviewed financial results for the second quarter ended Aug. 1. Sales for the 13-week period of $4.7 billion increased by 7.5% from the same period a year ago, but comps of 2% underperformed company and Wall Street expectations, reflecting core consumers that are now buying less than they used to as a result of continued economic pressure.

“Low and middle-end consumers are continuing to struggle. They have changed their buying habits," Dreiling told analysts. "Data now suggests that out of necessity, many folks have reduced their overall consumption, and absolute unit growth across Nielsen-measured channel data supports this. While our customer always finds a way to work through difficult times, she is struggling to overcome the sustained nature of the headwind she is facing."

Dreiling said the company was addressing this customer in part by expanding the number of items under its entry-level price-point Smart & Simple private brand, and strategically introducing consumable products at the $1 price point and non-consumable items priced at $1 to $5.

Net income of $251 million in the period was up only slightly from $245 million in the same period last year. Dreiling said the chain encountered more margin pressure than initially anticipated as a result of joining promotional battles around the Memorial Day and July 4 holidays. The promotions were primarily around soft drinks, bread and milk, and some national brand products — and were successful in driving sales, Dreiling noted. However, he said, heavy price battles among retailers have more recently subsided.

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