(Reuters) - Family Dollar Stores Inc rejected Dollar General Corp's sweetened takeover bid, saying the offer still did not address antitrust concerns, raising the prospect that the No. 1 U.S. deep discount chain will go "hostile" with its offer.
Dollar General raised its offer for Family Dollar Stores on Tuesday by 2 percent to $9.1 billion, or $80 per share, and said it was willing to sell up to 1,500 stores to clear any antitrust review.
Dollar General also offered to pay $500 million as break-up fee and warned it may take the offer directly to Family Dollar's shareholders if it was spurned again.
"There is a very real and material risk that the transaction proposed by Dollar General would fail to close, after a lengthy and disruptive review process," Family Dollar Chief Executive Howard Levine said in a statement on Friday.
Family Dollar last month rebuffed Dollar General's initial all-cash offer on antitrust concerns and said it would stick with an $8.5 billion, or $74.50 per share, cash-and-stock offer from Dollar Tree Inc.
Dollar General said on Friday it would continue to pursue its smaller rival and was evaluating its next steps.
"While we are hard pressed at this point to predict the next chapter in this ongoing soap opera, we think Dollar General is likely to come back to the table with a revised proposal, which will probably contain its own "hell or highwater" provisions," BB&T Capital Markets analyst Anthony Chukumba wrote in a note.
Dollar General's shares were down 2.9 percent at $62.55, while Family Dollar was down 1.6 percent at $78.80 in afternoon trading.
Dollar Tree said on Friday it amended its merger agreement with Family Dollar to include a commitment to divest as many stores as necessary to clear antitrust hurdles. It had previously agreed to divest 500 stores.
Family Dollar, the second-largest U.S. dollar store chain, said it expects the Federal Trade Commission to challenge a deal with Dollar General as it could lead to higher prices in areas where only the two are present.
Dollar General has played down antitrust concerns, saying that Wal-Mart Stores Inc was the primary driver for its pricing decisions, not Family Dollar.
But Family Dollar said shedding just 1,500 stores was not enough.
"Dollar General and Family Dollar compete in thousands of local geographies, with more than 6,000 Family Dollar stores competing with a Dollar General store within three miles," the company said. "Many of these stores - far more than 1,500 - do not have a Wal-Mart within the same distance."
Dollar Tree's bid is friendlier to Family Dollar's management. Under the agreement, Levine will remain CEO of Family Dollar if it was bought by Dollar Tree.
But he is widely expected to lose his job if Dollar General succeeds in buying Family Dollar, although this has not been confirmed.
Dollar Tree also said on Friday it expected the Federal Trade Commission to issue a "second request" for additional information on Sept. 8. The company said it now expects the deal to close by November 2014, well before its earlier forecast of early 2015.
Dollar Tree shares were up 0.3 percent at $55.21.
Additional reporting by Yashaswini Swamynathan; Editing by Sriraj Kalluvila and Saumyadeb Chakrabarty