Dollar General in Vermillion, Ohio
Dollar General in Vermillion, Ohio (Nicholas Eckhart/Flickr)

If Dollar Tree Inc. was hoping to scoop up rival bargain store chain Family Dollar Stores Inc. for a steal, it may have to think again.

On Monday, Dollar General Corp. raised the bid for Family Dollar to $8.95 billion, trumping Dollar Tree’s offer on July 28 of $8.5 billion and potentially heralding the start of a full-fledged bidding war.

Tennessee-based Dollar General is offering $78.50 cash per share to buy Family Dollar, in contrast to the $74.50 cash-and-stock bid that Dollar Tree is making. Dollar General also said it would pay the $305 million breakup fee that Family Dollar would owe for terminating its existing agreement with Dollar Tree.

The Dollar General bid represents a 29.4 percent premium over Family Dollar’s closing price the day before Dollar Tree’s merger announcement last month, and a 5.4 percent premium over Dollar Tree’s offer. The proposal is subject to the usual shareholder and antitrust regulatory approvals.

Simpson Thacher & Bartlett is representing Dollar General, while Cleary Gottlieb Steen & Hamilton is acting as legal counsel to Family Dollar. Wachtell, Lipton, Rosen & Katz and Williams Mullen are advising Dollar Tree, and Sullivan & Cromwell is representing Family Dollar’s financial adviser, Morgan Stanley & Co.

Dollar General said that it is “confident it can quickly and effectively address any potential antitrust issues,” and is prepared to divest up to 700 of its retail stores to get the necessary approvals. The proposed transaction would give Family Dollar an enterprise value of $9.7 billion.

The transaction would generate synergies of $550 million to $600 million annually for Dollar General from three years after the closing date, according to a news release on its website.

Family Dollar said in statement Monday that it had received Dollar General’s offer and would carefully review it. If the offer were to be accepted, the Dollar General-Family Dollar merger would create the dominant small-box retailer in the United States, with nearly 20,000 stores in 46 states, 160,000 employees and sales exceeding $28 billion.

Dollar General currently operates more than 11,000 stores in 40 states and has annual sales of $17.5 billion, according to the company. Family Dollar currently is the second- largest dollar store chain in the country, but if it were to move ahead with its merger with Chesapeake, Va.-based Dollar Tree, the combined company would displace Dollar General for the top spot.

The proposed deal, however, could present issues for Family Dollar’s home state of North Carolina, where the chain was founded as a family-owned store in 1959. Dollar General and Family Dollar have similar business models and could create greater redundancy than a Dollar Tree-Family Dollar hookup, according to the Charlotte Observer. Dollar Tree sells its merchandise for $1 or less, whereas Family Dollar stores and Dollar General stores have multiple price points.

Family Dollar Stores currently operate 8,100 stores in rural and urban communities in 46 states, according to the company. Among its largest shareholders are hedge funds run by Nelson Peltz and investor Carl Icahn, according to Bloomberg.

Dollar General’s chairman and chief executive officer, Rick Dreiling, said he would postpone his previously announced retirement and remain as chairman and CEO of a combined company until May 2016, if the merger agreement were signed, in order to oversee the integration of the companies.

Rhonda Taylor is senior vice president and general counsel of Dollar General. James Snyder Jr. is senior vice president, general counsel and secretary of Family Dollar Stores. William Old Jr. is chief legal officer and corporate secretary of Dollar Tree, according to its website.

Simpson Thacher provided legal counsel to Dollar General on its Family Dollar bid. The team is led by mergers and acquisitions partner Marni Lerner. Credit partner James Cross, capital markets partner Joseph Kaufman, tax partner Nancy Mehlman, antitrust partner Matt Reilly and executive compensation and benefits partner David Rubinsky are working on the proposed deal. Counsels Justin Hoffman and Sara Razi also are advising. They are assisted by associates Patricia Adams, Wenli Cai, Christian Fischer, John Goheen, Michael Guo, Michael Holick, Jeannine McSweeney, Sheri Nentin.

Lerner previously represented private equity firm KKR in its acquisition of Dollar General in 2007, according to Simpson Thacher’s website. The law firm has since represented Dollar General in a number of public credit offerings and other financial transactions, including in April 2013.

The Cleary Gottlieb legal team for Family Dollar is led by partner Ethan Klingsberg and includes employee benefits counsel Mary Alcock, antitrust partner Brian Byrne, securities partner Nick Grabar, financing partner Amy Shapiro and mergers and acquisitions partner Paul Tiger.

Sullivan & Cromwell’s team for Morgan Stanley as financial adviser to Family Dollar Stores includes corporate partners Francis Aquila and Melissa Sawyer.

Wachtell’s legal team for Dollar Tree includes corporate partners Daniel Neff and Trevor Norwitz. Antitrust partner David Schwartz and executive compensation and benefits partner David Kahan contributed, along with restructuring partner Eric Rosof and tax partner T. Eiko Stange.

The Williams Mullen team, also for Dollar Tree, is composed of business and corporate partners Will Hulcher and John Mitchell.