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Dollar General enters race for Family Dollar with $8.95 bln bid

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Aug 18 (Reuters) - Dollar General Corp offered to buy Family Dollar Stores Inc for $8.95 billion, trumping a bid by Dollar Tree Inc that had threatened to unseat the biggest U.S. discount retailer from the peak of a highly competitive market.

Shares of Family Dollar, the No. 2 U.S. discount chain, rose 5 percent to $79.87, above the offer price of $78.50 per share in cash, suggesting that investors anticipate a bidding war.

"Both Dollar General and Dollar Tree have some capacity to go a little bit higher with the offer price," said Joseph Feldman, analyst at Telsey Advisory Group.

Dollar stores have been a popular choice for U.S. consumers in a weak economy. Competition to woo penny-pinching customers has intensified, particularly as Wal-MartStores Inc has opened more small-format stores.

" ... They are trying to rally forces in order to compete more effectively," said Barbara Kahn, a professor at Wharton University of Pennsylvania.

Many large retailers that cater to low- and middle-income consumers reported disappointing quarterly sales at their established stores last week, pointing to a cutback in spending and a shift in preferences to stores nearer to home.

Sales at discount chains, however, have grown consistently since 2009 as shoppers have been spending more cautiously.

The U.S. market for dollar stores grew 45.7 percent to $48.2 billion between 2008 and 2013 and is expected to grow 18 percent in the next five years, according to Euromonitor International.

But the growth has recently started slowing due to intense competition, Kahn said.

"We have a tremendous amount of strength in the rural communities and we have things to learn in the metro," Dollar General Chief Executive Rick Dreiling said on a conference call. "Family Dollar is just the reverse."

A combined company will have nearly 20,000 stores across 46 U.S. states and annual sales in excess of $28 billion.

It would also allow Dollar General to retain its No. 1 spot among U.S. dollar stores. Dollar Tree's $8.5 billion bid for Family Dollar, announced on July 28, would have vaulted that merged company ahead of Dollar General.

Combined, the three dollar chains' annual sales total about $35 billion - less than a tenth of Wal-Mart's $473 billion.

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