Analyst: Dollar General should buy largest rival

Credit Suisse says deal could be worth $11B

Shares of Dollar General climbed to within 2 percent of their all-time highs Thursday after a Credit Suisse analyst said the Goodlettsville-based discount retailer would make a good buyer for Family Dollar, its largest pure rival.

In a note to investors, Edward Kelly said a Dollar General-Family Dollar deal "makes compelling strategic sense" and would give the combined company opportunities to both boost sales and cut costs. Cutting out a major direct competitor, he wrote, also would let Dollar General Chairman, President and CEO Rick Dreiling be more proactive in positioning Dollar General to take the fight to other retailers such as supermarkets.

"The merger of Dollar General and Family Dollar would create the largest small box retailer in the U.S. and the 'champion' for the fill-in trip at affordable prices," Kelly said.

Combined, the two companies now run more than 18,000 locations nationwide and had combined 2012 revenues of more than $25 billion. Kelly said Dollar General could pay between $90 and $100 per Family Dollar share, which closed Wednesday at $70.33. At the midpoint of that price range, Family Dollar would be worth about $11 billion.

Dollar General spokeswoman Mary Winn Gordon said the company does not comment on merger speculation.

At about 12:30 p.m., shares of Dollar General (Ticker: DG) were up 1.3 percent to $54.80. Family Dollar (Ticker: FDO) was changing hands at $73, up almost 4 percent on the day.

One question to consider about a possible deal is the health of Family Dollar versus Dollar General. Bank of America Merrill Lynch analyst Denise Chai said Family Dollar's falling margins wouldn't give Dollar General much upside. Then again, bringing on Family Dollar and squeezing efficiencies from a combined company is a line of thinking similar to the thesis, floated last week by Nomura analyst Aram Rubinson, that Dollar General's days of go-go growth are coming to an end.