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Can you spare a few more dollars? The war for control of the so-called "dollar store" space heated up Monday with Dollar General entering the sweepstakes for Family Dollar.

Dollar General DG bid $78.50 per share, or about $9.7 billion, for Family Dollar Stores FDO, the firm said in a statement. The offer surpasses Dollar Tree's $8.5 billion bid made in late July.

Dollar Tree DLTR offered to pay shareholders $59.60 in cash and the equivalent of $14.90 in shares of Dollar Tree for each Family Dollar share they own. The companies put the value of the transaction at $74.50 per share.

The latest salvo in the battle to acquire Family Dollar is likely not the end of the bidding contest, but rather "probably the beginning," says Joan Storms, a retail analyst at Wedbush Securities.

Family Dollar's shares finished around 5% higher Monday, at $79.81, suggesting markets are anticipating yet another higher bid. Standard & Poor's Capital IQ on Monday raised its 12-month target price on Family Dollar to $80 a share.

A marriage between Dollar General — the largest of the three retailers — and Family Dollar is a better union, Storms says. Both are multiprice discount retailers that sell most goods below $10, and are more reliant on sales of consumable products. Dollar Tree is a straight-up seller of $1-priced non-consumable goods.

"The Dollar General offer makes more sense," says Storms. "There are more synergies and earnings accretion from the deal."

Family Dollar is also a good match as there is room to improve its business operations, ranging from employee productivity to profit margins, she adds.

Still, other factors could give Dollar Tree a shot at winning the game if it ups its bid for Family Dollar. Dollar General's bid is just $4 per share higher than Dollar Tree's, but the Dollar Tree deal would enable Family Dollar CEO Howard Levine to keep his job, and keep the Family Dollar name alive, Storms says. In addition, the boards of both companies have already signed off on a deal.

"They (Dollar Tree) are still in the mix," says Storms.

Rick Dreiling, Dollar General's chief executive officer, said Monday: "For Family Dollar shareholders, our proposal is financially superior to the current transaction agreement with Dollar Tree and would provide Family Dollar shareholders with a substantial premium and immediate liquidity for their shares."

Dollar General shares surged Monday, gaining nearly 12%, or $6.68 to $64.14. The loser in terms of stock market reaction was Dollar Tree, which saw its shares tumble $1.35, more than 2%, to $54.26.

The proposed acquisition of Family Dollar, according to Dollar General, would require it to divest up to 700 stores to alleviate potential antitrust issues.

"Dollar General has undertaken significant economic and antitrust analysis with respect to the transaction and is confident it can quickly and effectively address any potential antitrust issues," the company said in a statement.

If Dollar General's superior bid is enough to seal the deal for its rival, Dollar General would cement its position as the largest U.S. small-box discount retailer, the company said.

Dollar General ticked off a few benefits of its proposed merger with Family Dollar. It said a merger with Family Dollar would provide $550 million to $600 million in savings and profit "synergies" three years after the deal is closed.

The three discount chains sell a variety of household items, food, health and beauty accessories and clothing, though Dollar Tree also offers a large selection of party supplies and stationery.

All three of the leading small-box discounters fared well during and after the Great Recession, drawing healthy shares of middle-income consumers who were pinching pennies, says analyst Nick Mitchell of Northcoast Research.

But as the economy has improved the past couple of years, the chains have had to rely more heavily on their core lower-income customers. Federal cuts to food stamps and unemployment benefits have eaten into their incomes and crimped their discretionary spending, Mitchell says.

While Dollar General and Dollar Tree have dealt successfully with the more challenging landscape, Family Dollar has struggled, Mitchell says. The company, he says, has drifted away from its strategy of everyday low prices to focus more on promotions, and popular items are sometimes out of stock.

Dollar General and Dollar Tree each have increased their store locations by about 6% annually in recent years. But Family Dollar recently announced it will close nearly 400 stores in the current fiscal year, growing its store count by just 1.6%.

Dollar General, which has 11,300 stores in 40 states, has annual revenue of $17.5 billion, according to the company's filings. If it adds Family Dollar, which rakes in $10.39 billion in sales and has more than 8,200 stores in 46 states, the combined sales of the company would reach almost $28 billion.

In contrast, a marriage between Dollar Tree, whose 4,900 stores ring up $7.84 billion in annual sales, and Family Dollar would add up to an entity with combined sales of roughly $18 billion.

It is unclear as to whether Dollar Tree will engage in a bidding war and up its prior offer.

Dollar General's bid could also change its CEO's retirement plans. Dreiling says he will postpone his planned retirement and remain chairman and CEO until May 2016 if the deal closes.

Contributing: Kim Hjelmgaard

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