Dollar General bids billions for Family Dollar

When it comes to the low-cost world of dollar stores, things are getting pricey.

Dollar General (DG), the biggest U.S. dollar store chain, has rung up a $9.7 billion offer for smaller rival Family Dollar (FDO), just three weeks after Dollar Tree (DLTR) itself made an $8.5 billion offer for the company.

The battle for Family Dollar comes as more Americans are shopping at so-called dollar stores, which generally sell their inventory for $1 per item, taking market share from larger big-box retailers such as Walmart (WMT). Dollar General chief executive Rick Dreiling said on a conference call that its counteroffer is "far superior" to Dollar Tree's bid.

Dollar General, which was thought to have been a logical bidder for Family Dollar, was surprised at the announcement that the two smaller rivals planned to merge, Dreiling added. If the company is successful with its counterbid, the resulting company would have almost 20,000 stores in 46 states, and revenue exceeding $28 billion.

"We have expressed interest in a combination with Family Dollar multiple times over the last few years," Dreiling said on the Monday morning call. "Suffice it to say, for someone who was supposedly involved in the process, we were very surprised by Family Dollar's announcement with Dollar Tree."

Still, Dreiling said it was "water under the bridge." Dollar General, which is offering $78.50 per share in cash, said in a statement that it had sent its offer in a letter on Monday morning to Family Dollar's board of directors.

Dreiling added that had he known the smaller rivals were planning to merge, he would not have announced his retirement, which he had planned to take in May 2015. Now, with Dollar General's counteroffer, he said he plans to remain as CEO of the combined company through May 2016.

The combination of Dollar Tree and Family Dollar would create a chain with 13,000 retail locations and sales of $18 billion, creating a significantly smaller organization than the proposed merger between Dollar General and Family Dollar.

Whatever the outcome, a bidding war will profit two big shareholders in Family Dollar, activist investor Carl Icahn, who has a 9.4 percent stake in the company, and Nelson Peltz' Trian Fund Management, which owns about 7.3 percent. Icahn had been pushing Family Dollar to sell.

The bidding war demonstrates how valuable the discount segment has grown, with dollar stores seemingly located in almost every American town. A modern-day version of the "five-and-dime," dollar stores offer simple pricing and a wide variety of products, from canned food to holiday decorations.

With more Americans living in poverty and middle- and low-income household income stagnating, consumers are increasingly strapped for cash, spurring some to turn to discount stores. The number of people in the U.S. living in poverty rose to almost 49 million in 2012, up from 33.3 million in 2000, according to the Census Bureau.