Dollar General, the biggest US deep-discount chain, started a bidding war Monday for number-two Family Dollar Stores, trumping a Dollar Tree merger deal agreed just weeks ago.
The battle underscores the tough competition among retailers in suburban and rural America, where the three chains go head-to-head with titan Wal-Mart and others for low- and middle-income consumers.
A Dollar General-Family Dollar combination would have nearly 20,000 stores in 46 states and sales of more than $28 billion. That compares with Walmart's 4,900 mostly much larger US stores which generate 12 times that much in sales.
Dollar General offered to pay $78.50 per share for Family Dollar, $4 more than Dollar Tree's offer, in an all-cash deal valued at $9.7 billion.
Dollar General said it has committed financing for the deal and would pay the $305 million breakup fee if Family Dollar ended its agreed merger with Dollar Tree. To address any potential antitrust issues, it also said it was willing to divest up to 700 stores.
On July 28, Family Dollar, under pressure from activist investor and shareholder Carl Icahn, agreed to be acquired by Dollar Tree, the third-biggest dollar-store chain, in a cash-and stock deal valued at $9.2 billion, including debt.
At the time Icahn said he was pleased with the deal, but added that he believed there were "a handful of potential buyers" who would make better partners for Family Dollar. We "are hopeful that one or more of them will surface as a result of today's announcement," he said.
Dollar General said Monday that its offer was "substantially superior" to Dollar Tree's, giving Family Dollar shareholders a better price and immediate liquidity for their shares.
The customers of both companies would also benefit because "we would be able to provide better value and greater selection," said Rick Dreiling, Dollar General's chairman and chief executive.
If a merger agreement is reached, Dreiling, who previously had announced his retirement, would remain in his dual roles in the combined company until May 2016 to oversee the integration, the Goodlettsville, Tennessee-based company said.
Family Dollar confirmed it had received Dollar General's offer and said that its board of directors  will "carefully review and consider the proposal."
Meanwhile, it said the board has not changed its recommendation in support of the merger with Dollar Tree.
Dollar Tree's proposed tie-up with Family Dollar, which sells name-brand and private-label goods at various prices, would create a smaller company with sales of more than $18 billion and more than 145,000 employees.
Dollar Tree declined to comment.
- Dollar General expanding -
Dollar General announced in June it would expand into three new states -- Maine, Rhode Island and Oregon -- in the coming months, bringing its footprint to 43 states.
The company estimated the tie-up with Family Dollar would generate synergies of $550-$600 million annually three years after the deal is completed.
Bank of America predicted the combination with Family Dollar would be "very accretive to earnings."
"Importantly, in our view, the deal should also lead to a slowdown in absolute store growth as well as take out a major competitor, putting DG in a better position to deal with WMT's (Wal-Mart's) eventual ramp-up in the small-format stores," the bank said in a research note.
"We view the deal as a win-win for all dollar stores and believe a counter offer from DLTR (Dollar Tree) unlikely, as more leverage would be required and synergies are far lower."
Family Dollar shares gained 4.9 percent to $79.81, while Dollar General added 11.6 percent and Dollar Tree fell 2.4 percent.