Dollar General new bid may not sway Family Dollar-sources

By Nadia Damouni and Olivia Oran

NEW YORK (Reuters) - Dollar General Corp's (DG.N) sweetened $9.1 billion (5.57 billion pound) proposal to buy Family Dollar Stores Inc (FDO.N) may fall short of allaying its smaller rival's fears U.S. antitrust regulators will block the deal, according to two sources familiar with the matter.

Family Dollar already has a deal to sell itself to rival discount retailer Dollar Tree Inc (DLTR.O) for $8.5 billion. Dollar General, the largest U.S. dollar store, first appeared as an interloper last month with a $8.95 billion competing bid, or $78.50 per share, but Family Dollar rejected the offer saying it could run afoul of competition laws.

Earlier this week, Dollar General returned with a new proposal, offering $80 per share and saying it would pay a $500 million reverse break-up fee to Family Dollar if regulators scuttle the proposed deal. Dollar General also said it would be willing to divest up to 1,500 stores, an increase from the 700 it originally proposed last month.

But the sources familiar with the matter said the two key remedies offered by Dollar General - the break-up fee and offer to sell more stores - failed to compensate the company for regulatory risk and may not work.

Family Dollar's board has yet to convene to review the new proposal and a final decision on whether it should reject the bid has not been made, the sources said. But they added that the early sense within Family Dollar was that the new proposal still did not go far enough.

Ideally, Family Dollar would want Dollar General to say it will do whatever it takes to close a deal, especially if it believes the proposed combination would pass regulatory muster, they said.

However, Family Dollar has not engaged in a formal discussion with Dollar General, which has prevented it from analyzing its larger rival's data.

A spokeswoman for Dollar General declined to comment. But in a press release on Tuesday the company said, "we are confident that our enhanced proposal sufficiently addressed any concerns that led Family Dollar's Board of Directors to reject our prior proposal without any discussions between our companies."

A spokesman for Family Dollar declined to comment.

If Family Dollar does reject the new bid, it could set the stage for a protracted battle for its future at a time when the dollar-store sector is struggling amid increased competition from big box stores like Wal-Mart Stores Inc (WMT.N) and Target Corp (TGT.N).

Some pressure from investors has eased, however. Sources told Reuters on Wednesday that billionaire investor Carl Icahn, who until recently was a vocal critic of Family Dollar management and had advocated for a sale to Dollar General, had sold his stake.

ANTITRUST CONCERNS

A combined Dollar General-Family Dollar would have nearly 20,000 stores across 46 U.S. states and annual sales in excess of $28 billion.

Dollar General's proposed $500 million break-up fee represents roughly 5.5 percent of the total transaction value. But the sources said it falls short of the agreed amount in some other situations where there were big regulatory risks to the deal.

For example in 2011, when AT&T Inc (T.N) negotiated a deal to buy T-Mobile USA from its parent Deutsche Telekom AG, it agreed to pay cash and assets worth about $6 billion to compensate the seller if regulators shot down the deal.

While the cash agreement was already unusually high at 7.7 percent of the total deal price, the addition of assets and services of a similar value meant the companies broke global records with a 15.4 percent break-up fee, according to Thomson Reuters Data.

Family Dollar thinks that the deal, which would unite the two largest U.S. discount retailers, would face the same amount of scrutiny, if not more, as AT&T's T-Mobile bid, the sources said. And so it should come with equally huge break-up fees, they added.

Further, one of the sources said Dollar General's promise to divest up to 1,500 stores does not remove regulatory risk either in the company's view. There are almost 3,000 zones where Family Dollar and Dollar General have stores within three miles of each other and there are no other competitors, the source said.

One antitrust lawyer who is not involved in the transaction said Family Dollar's insistence on antitrust risk could be a strategy to drive up the price.

"I wouldn't get too hung up on Family Dollar pointing to the antitrust risk," said Jonathan Klarfeld, an antitrust lawyer with Ropes & Gray LLP. "It's still in their interest to say that there's an antitrust problem because they're still in negotiation."

But he added that Dollar General may not know enough to rule out antitrust issues since it does not have access to Family Dollar's confidential files. Klarfeld also said the Federal Trade Commission would challenge the deal if the regulator and the companies could not agree on which stores to divest or if acceptable buyers for the stores could not be found.

(Additional reporting by Soyoung Kim in New York and Diane Bartz in Washington; Editing by Paritosh Bansal and Tom Brown)