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Family Dollar Takeover: The Ball Is in Dollar General’s Court

Tickers in this article: DG FDO

NEW YORK ( TheStreet) -- Dollar General didn't announce any new offer for Family Dollar as the discount retailer reported mixed second-quarter earnings on Thursday.

Dollar General CEO Rick Dreiling did say he remains intent on a merger and the company is reviewing its options. One source familiar with Dollar General's thinking conceded on Thursday that the ball remains in the company's court after its initial efforts at a merger were rejected by Family Dollar in mid-August. Dollar General has offered $78.50 a share in cash for Family Dollar, topping a $74.50 cash-and-stock merger that was agreed between the company and Dollar Tree in late July.

Family Dollar didn't engage Dollar General's higher offer in earlier this month, stating that antitrust hurdles presented too much of a risk to its shareholders. With hedge fund investors such as Trian Management privy to and supportive of Family Dollar's sale process , it will be interesting to see what strategy Dollar General uses in trying to push its bid forward.

Read More: Dollar General Affirms Interest in Family Dollar Merger

There are some obvious ways for Dollar General to keep the ball rolling on its competing offer for Family Dollar. While Dollar General is already offering a higher price than Dollar Tree, it could increase that offer to create a new formula of risk-reward for Family Dollar's board to consider. BMO Capital Markets analysts also believe Dollar General could offer some assurances to mitigate antitrust risks.

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Dollar General could commit to an antitrust reverse termination fee and increase a divestiture package stipulated in the company's competing offer for Family Dollar as a way to get both parties to the negotiating table, BMO analysts said in a Thursday note to clients.

Already, Dollar General has committed to divesting 700 stores as part of its proposal for Family Dollar, given a roughly 30% geographic overlap between the two discount retailers. In contrast, Dollar Tree has a far more limited geographic overlap , according to analyst calculations.

An antitrust reverse termination fee coupled with greater divestitures offered by Dollar General, or simply a higher price, may better balance the regulatory risks of its offer for Family Dollar shareholders.

Trian Management, a tough-negotiating hedge fund investor on Family Dollar's board and a member of a four-person board committee tasked with the company's strategic review, specifically pointed to antitrust risks when rejecting Dollar General's offer.

"The CEO of Dollar General said he believes that antitrust is not a risk but did not put forth a proposal that eliminates regulatory risk for Family Dollar shareholders," Ed Garden, a Trian executive, said in August.

"Given the significant antitrust issues involved with Dollar General's proposal, we will not jeopardize the Dollar Tree deal for a transaction with Dollar General that has a high likelihood of not closing due to antitrust considerations," Garden added.