Another day, another dollar-store bid. Photographer: Scott Eells/Bloomberg
Another day, another dollar-store bid. Photographer: Scott Eells/Bloomberg

Once upon a time in June, Family Dollar and Dollar General had a good thing going. They were seeing quite a bit of each other. There were late-night phone calls, clandestine meetings, notes passed by go-betweens. But gradually their mutual ardor cooled and they drifted apart. Next thing Dollar General knew, Family Dollar had announced its engagement to a different dollar store, Dollar Tree. Sure, Dollar General had thought it wanted to break up with Family Dollar, but this news hurt. Dollar General realized that it still had feelings for Family Dollar. It wanted to get back together, for good this time.

So Dollar General sat down to write Family Dollar a letter, to put into words how it felt. And its emotions just started pouring out:

Dear Howard:

As you know, we at Dollar General admire your company and its attractive footprint and business prospects.

Wheeeeee it went right for the footprint. If you're not touched by the naked romanticism of this letter, you have no heart.

Carl Icahn is not touched. He's livid, actually, and he kind of has a point. Also in June, Icahn announced that he had bought 9.4 percent of Family Dollar and wanted it to sell itself. Unknown to him, it was already quietly trying to do just that: It had been talking to potential bidders since at least last year. For what appear to be quite logical reasons, it had limited those efforts to the two potential buyers who had the word "Dollar" in their names.

In July, Family Dollar announced that it had agreed to sell itself to Dollar Tree for $74.50 a share in cash and stock. Icahn declared himself "extremely pleased," meaning "kind of grumpy." But last week, Family Dollar filed a proxy statement explaining its choice of Dollar Tree by saying that:

  • Dollar General had "conveyed," on June 19, that it "was not interested in a strategic transaction with Family Dollar at this time," and
  • it was because of Carl Icahn: Dollar General "would be reluctant to participate in the negotiation of a transaction with Family Dollar if Mr. Icahn were to have a role in or control over the process."

Ouch! All of Icahn's work to get those two together just drove them further apart.

Or did it? Yesterday Dollar General offered $78.50 in cash to buy Family Dollar and break up the Dollar Tree deal. Here is Rick Dreiling, chairman and chief executive officer of Dollar General and author1 of the steamy letter I quoted above, on a conference call today:

I will be honest with you we have an interest in the combination with Family Dollar multiple times over the last few years. Suffice it to say for someone who was supposedly involved in a process, we were very surprised by Family Dollar’s announcement with Dollar Tree.

And here is Icahn:

I’m also surprised. Today’s actions prove once again (as Charlie Gasparino tweeted this morning), the relevance of activism. Even as cynical as I am about the dysfunction of so many boards, I find it hard to believe that before agreeing to a $305 million breakup fee to Dollar Tree (which was obviously designed to chill other bidders), Family Dollar wouldn’t first be absolutely sure Dollar General wasn’t interested in bidding. Could the fact that Family Dollar’s CEO, Howard Levine, has a future role in a Dollar Tree/Family Dollar merger have anything to do with it?

He's got a point, right? It's pretty weird. According to the proxy, Dollar General passed on Family Dollar on June 19, when it was trading at $68.14 a share.2 Two months later, Dollar General announced a bid for Family Dollar of $78.50 a share -- and offered to pay the $2.68 per share breakup fee3 that Family Dollar will owe to Dollar Tree if it abandons their deal. If Dollar General had offered $80 a share in June, it would have easily beaten out Dollar Tree's offer and saved itself $1.18 a share.

Why didn't it? "It was afraid of Carl Icahn," the explanation insinuated in Family Dollar's proxy, seems ... weak? Icahn scoffs, "The company for some reason chose to bring it up and blame me for the fact that Dollar General wasn't interested, which is completely disingenuous."4 After all, he's still quite noisily in the stock today. (Though he's sold down to 3.6 percent, so perhaps he's now just one-third as scary.)

But there is a difference between a company seeking to sell itself because an activist is pestering it to do so, and a company with an actual bid on the table. Here's Bloomberg News two weeks ago:

While Dollar General had earlier passed on the chance to bid for Family Dollar, the company is re-evaluating its options out of concern that the smaller retailer may soon be out of its reach for good, two people said.

That concern was, of course, created by Family Dollar signing a merger agreement with Dollar Tree. It looks like, when Dollar General told Family Dollar that it wasn't interested in a deal, it figured it had all the time in the world to change its mind.5 When it saw Family Dollar slipping into the hands of Dollar Tree, it discovered a new sense of urgency.

Of course you could imagine other ways of creating that urgency. Icahn's fury is not just about being blamed for scaring off buyers; it's also about his belief that Family Dollar didn't do enough to get a bid from Dollar General back in June. Dollar General is sort of obviously a better buyer for Family Dollar than is Dollar Tree. It's bigger than Tree, and has more money to spend. Its business is more similar to Family Dollar's than Tree's is.6 And it estimates $600 million of synergies from a deal, versus $300 million for Tree.7

All of this was pretty apparent to Family Dollar in June. So when Dollar Tree made its offer, surely someone in the Family Dollar camp could have gone to Dollar General and said, look, we really are about to sign a deal, do you want in or not? It's hard to know what Dollar General would have said, but, I mean, it did put together its own bid pretty quickly after learning about the Dollar Tree deal. It sure looks like it could have been coaxed into bidding. And, again: If Dollar General had made an offer before Family Dollar signed with Dollar Tree, it would have had an extra $2.68 a share to spend on Family Dollar shareholders instead of on a breakup fee to Dollar Tree.

So Icahn's second-guessing looks reasonable. But it's not an open-and-shut case. Merger negotiations are a bluffing game, and it's possible that, no matter what Family Dollar had said, Dollar General would never have been moved to put in a serious bid in the unstructured darkness of those negotiations. Perhaps only a public, signed merger agreement with another bidder would convince Dollar General that Family Dollar was serious. Rather than bidding blindly against one or more unknown other buyers at unknown prices, Dollar General is now in an open auction where it knows the target it has to hit. It's paying a price to get into that open auction -- $2.68 a share, to be precise -- but perhaps it's worth it.

And so perhaps it's worth it to Family Dollar too. Family Dollar essentially spent $2.68 of shareholder money to create an open auction, in the theory that that would attract a serious bid from Dollar General. It's hard to know whether that was the right decision, but it does kind of look like it worked.

1 (Signer.)

2 A price reflecting an expected-deal bump from Icahn's interest. On June 6, before Icahn's announcement, the stock closed at $60.53; it closed at $68.62 the following Monday.

3 That is, a $305 million breakup fee divided by 113.9 million shares outstanding.

4 Incidentally that link is very much worth reading; Icahn was in rare form today, and made a televised pitch for more Twitter followers. Even more spectacular is this Fox Business interview, in which Icahn slams Family Dollar CEO Howard Levine (no relation!), with whom he had dinner:

Icahn described the dinner as friendly; "it was nice...we had a few drinks." But he also described Levine--whose father started Family Dollar in 1959--as an entrenched chief executive who needs to be replaced for the good of shareholders. ...

Icahn said Levine expressed unwillingness to follow his advice; Levine, he said, told him that he "knows how to handle you activists." That's when Icahn said he told Levine, "I'm no ordinary activist."

He really isn't though. He's the best.

5 A related timing point is that Dreiling had planned to retire, but has now committed to stick around to run the integration.

6 In that "Both it and Family Dollar sell low-cost goods at a range of prices, while Dollar Tree primarily focuses on products valued at $1 or less." There's a surprising diversity of dollar-store business models.

7 And it's pretty confident that it will get through antitrust review, though I guess it's less certain in a Family/General deal than in a Family/Tree one. Here is Ronald Barusch on potential divestitures. An oddity is that stores divested by Family/General would probably be sold to Tree. It's sort of weird that the three big dollar-store chains could combine into two, and require divestitures, but no divestitures outside of the system.

To contact the writer of this article: Matt Levine at mlevine51@bloomberg.net.

To contact the editor responsible for this article: Tobin Harshaw at tharshaw@bloomberg.net.