Dollar General CEO Rick Dreiling and the company’s board of directors have entered a bidding war for rival Family Dollar with a $9.7 billion offer announced Monday (Aug. 18.).

The bid to pay $78.50 per share for Family Dollar comes on the heels of Dollar Tree’s $8.5 billion, or $74.50 per share, deal.

Dreiling said during the company’s conference call on Monday that several offers were made privately over the last year, long before the Dollar Tree offer was announced. The letter sent to Family Dollar Directors spells out a compelling opportunity to own the dollar store channel creating nearly 20,000 stores in 46 states with combined sales exceeding $28 billion.

Wall Street analysts said the Dollar General deal makes more sense given the two stores are much more alike that their competitor Dollar Tree. A Dollar General/Family Dollar merger would create more competitive pressures for big box giants like Wal-Mart Stores Inc., which is just now expanding into smaller formats to try and win more convenience shopping dollars.

Carol Spieckerman, president of Bentonville-based NewMarketBuilders, said Family Dollar offers advantages to Dollar General and Dollar Tree.

“On the surface, Dollar General’s business model would seem to be more compatible with Family Dollar yet that presents challenges as well. Hundreds if not thousands of locations may be found to be duplicative given that both retailers pursue similar demographic profiles,” Spieckerman explained. “On the other hand, since Dollar Tree is a multi-format retailer, buying Family Dollar would be equivalent to it adding a new format to its portfolio. That could make a Dollar Tree purchase easier in the end, particularly in terms of mitigating antitrust concerns.”

Dreiling said the strategic benefits of a Dollar Store/Family Dollar deal include operational synergies of $550 million to $600 million on an annual run-rate three years post-closing.

“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,” Dreiling said in a statement.

Dreiling, who was set to retire in 2015, said he would stay on as CEO and chairman until May 2016 if Family Dollar approves their offer. During the call, Dreiling said no one was more surprised to hear about the Dollar Tree deal than he was, given that Dollar General had approached Family Dollar multiple times over the past year about a merger. The lack of interest is one reason Dreiling opted to retire next year.

“We have the utmost respect for Family Dollar, its leadership and its employees. We look forward to expeditiously entering into constructive discussions with Family Dollar in order to sign a definitive merger agreement that provides enhanced value to Family Dollar shareholders and enables Dollar General to realize the benefits of this combination,” Dreiling said.

Dollar General has lined up the financing with Goldman Sachs which includes estimated fees and expenses and the $305 million termination fee payable to Dollar Tree in the event Family Dollar terminates the existing merger agreement and takes the Dollar General deal.

Dreiling said Dollar General has conducted economic and antitrust analysis with respect to the transaction and is confident it can address any potential antitrust issues. Dollar General is prepared to sell up 700 retail stores to achieve the regulatory approvals, which is approximately the same percentage of the total combined stores represented by the 500 U.S. store divestiture commitment in the Dollar Tree merger agreement.

Family Dollar and Dollar Tree have yet to respond to the Dollar General offer and there is also the opportunity Dollar Tree will raise the stakes which is pushing Family Dollar shares higher. Family Dollar shares jumped nearly 5% to $79.64 on Monday with the Dollar Store bid.

Dollar General shares rallied 10.35% on Monday’s announcement trading at $63.37, up $5.91 on heavy volume. Dollar Tree shares dipped 2% to $54.47 on the news.

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