Dollar General (NYSE: DG) Goes After Family Dollar

The bidding war for Family Dollar Stores has begun.

Monday, Dollar General Corp. (NYSE: DG), America's biggest discount retailer, announced it is offering $9.7 billion (including debt) to buy Family Dollar Stores (NYSE: FDO), a move aimed at thwarting FDO's planned merger with Dollar Tree Inc. (Nasdaq: DLTR).

News sent shares of FDO and DG stock up some 5% in pre-market to $79.99 and $62.01 respectively. Dollar Tree shares, meanwhile, were clipped 1.45% to $54.80.

Under terms of the deal, Dollar General will pay $78.50 a share in cash for each outstanding share of Family Dollar. That's substantially more than the $74.50 a share cash and stock bid Dollar Tree offered last month. At the time, Dollar Tree's offer was a 23% premium to Family Dollar's stock price prior to the announcement.

Dollar General said a merger with Family Dollar would create a "preeminent small box retailer" boasting a store count of around 20,000 peppered across 46 states. Combined sales would total more than $28 billion, according to Dollar General.

Dollar General also said it expects to generate $550 million to $600 million in cost savings.

"For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares," Dollar General Chairman and Chief Executive Rick Dreiling said.

Dreiling, who earlier this year had revealed plans to step down, would instead stay on board and hold both CEO and chairman roles at the combined company through 2016.

The rival bid from DG isn't a big shock to analysts.

Credit Suisse said after Dollar Tree's bid that a Dollar General counteroffer would likely come - probably with an $80 price tag. So, Dollar General's $78.50 bid might indeed be the first of several bids should a bidding war ensue.