Why Family Dollar is betting on a lower offer

In the battle for the future of Family Dollar (FDO), the company itself is picking sides, but time may be running out.

America's dollar store chains erupted in a takeover skirmish last year when two rivals -- Dollar Tree (DLTR) and Dollar General (DG) -- bid for Family Dollar. That's left the future of Family Dollar hanging, while it also copes with a new pricing strategy that derailed its margins and ate into its fiscal first-quarter profits and an antsy suitor.

Family Dollar has a message for its shareholders: Bet your dollars on Dollar Tree. Back in July, Dollar Tree offered $8.5 billion to buy Family Dollar, but the plan was waylaid after larger rival Dollar General muscled in with its own unsolicited offer of $9.1 billion.

Family Dollar is telling investors that sweeter offer from Dollar General is, well, a dollar short -- at least metaphorically. Instead, it's urging shareholders to vote in favor of the $8.5 billion offer from smaller rival Dollar Tree, calling regulatory approval of the deal a "virtual certainty."

While it may seem as though the higher offer should win out, there may be serious issues with securing regulatory approvals for the Dollar General offer, according to Family Dollar.

After discussions with the Federal Trade Commission, Family Dollar said it would be difficult for Dollar General, the country's biggest dollar store chain, to divest enough stores to win regulatory approval of the deal. Dollar General didn't immediately return a request for comment.

The feedback from the FTC "reaffirms the statements that we have been making for several months now about the inability of the Dollar General proposal to be consummated on the terms proposed by Dollar General and the certainty of the Dollar Tree merger," Family Dollar chief executive Howard Levine wrote in the letter to shareholders. He added, "Antitrust clearance of the Dollar Tree merger on its terms and in a timely manner is a virtual certainty."

Shareholders will vote on the Dollar Tree offer on Jan. 22. If the vote doesn't go in Dollar Tree's favor, the would-be purchaser hinted it may walk.

"After two delays, we have been more than reasonable but have reached the end of our patience," Dollar Tree chief executive Bob Sasser wrote in a letter to Levine that was delivered on Jan. 9. "Dollar Tree is not willing to agree to any further adjournments of the shareholder meeting."

If shareholders decide to hold off on the richer deal, Dollar Tree would be able to walk away with a $305 million breakup fee.

In the midst of the takeover saga, Family Dollar is dealing with troubles on its own shelves. Its fiscal first-quarter net income plunged 47 percent to $41.4 million, or 36 cents a share, or lower than analysts had expected. The company's results were crimped by focusing on an "everyday low price strategy," which ate into margins.

If shareholders vote in favor of Dollar Tree on Jan. 22, the merger could close as early as March, Family Dollar said on Monday.