How the dollar store war was won

April 24, 2015, 10:00 AM UTC
Illustration by Matthew Woodson for Fortune
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Above illustration by Matthew Woodson

The inside tale of how Carl Icahn and a bevy of billionaires brawled in the greatest activist contest of the millennium—for companies that sell panty hose and paper towels to discount shoppers.


It was the elevator ride that many a CEO has come to dread. On the evening of June 18, 2014, Howard Levine, the CEO of Family Dollar Stores, arrived for his meeting at the sumptuous Museum Tower residence in Midtown Manhattan. A white-gloved lift operator hit the button to take him to the penthouse apartment on the 51st floor. Waiting for him was Carl Icahn.

Twelve days earlier, Icahn, the powerful activist investor and founder of Icahn Enterprises, had announced that he’d bought 9.4% of Family Dollar’s shares. That same day the 79-year-old multibillionaire called Levine at Family Dollar’s modest headquarters outside Charlotte and invited him to fly up for dinner. Like so many corporate chiefs before him—from Apple’s Tim Cook to former Chesapeake Energy CEO Aubrey McClendon to Greg Brown of Motorola Solutions—Levine was being summoned for the ultimate activist experience, a ritual in which the dean of Wall Street dealmakers plays the gracious host to the target of his latest campaign while dictating exactly how things are going to go down. Levine knew he couldn’t say no.

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When Levine, 56, stepped out of the elevator into Icahn’s 11,000-square-foot duplex, he and fellow Family Dollar board member George Mahoney were escorted by a butler to the expansive balcony. There they found Icahn mixing a batch of ­martinis—Ketel One vodka, up with a lemon twist—for himself and two lieutenants. “Can I get you a drink?” Icahn asked Levine. “I’d love one,” replied Levine, “but I’ll say no, since I want to keep my wits about me.” Icahn didn’t miss a beat. “Not drinking isn’t going to help you,” he fired back, “so you might as well drink.” Levine decided to stay sober anyway.

Over a dinner of lamb chops, Icahn told Levine he should sell the struggling Family Dollar business, which Levine and his family had run for 55 years, to its bigger, better-run rival, Dollar General. If he played his cards right, Icahn suggested, he might even get a bidding war going. “Carl said he’d broker the deal, that he was the one to get the best price,” Levine recalls. Levine argued that trying to sell to Dollar General was futile. He maintained that he had great plans for reviving his own company. When Levine blamed a Family Dollar problem on another, recently departed executive, Icahn cut him off.

“Stop making excuses!” the blunt, Queens-born billionaire replied. “Tell it to your mother.” Levine couldn’t help laughing. He’d heard all about Icahn’s cocktail for confronting CEOs: jiggers of brute force mixed with splashes of high comedy.

There are few bigger stories in corporate America than the rise of activist investors in recent years. The dinner attested to the immense clout wielded by Icahn and a handful of billionaire activists. And the ceremony drove home the new, undeniable reality for Levine: Whether he liked it or not, his company was now in play, and he would have to scramble to influence events.

Other activist billionaires were already circling, squaring off in what became an epic, 18-month war—one that has only recently drawn to a close. As Fortune went to press in late April, the smaller Dollar Tree chain was close to completing a $9.1 billion acquisition of Family Dollar. To make the deal happen, the two discount retailers had to fend off a no-holds-barred, last-minute assault from Dollar General and contend with a host of the most demanding investors—and biggest egos—on Wall Street.

The merger battle over Family Dollar was a veritable activists’ brawl, pitting many of the boldest names in finance against one another. Among the titans vying for profits in the contest were Nelson Peltz of $15 billion Trian Fund Management, John Paulson of $18 billion Paulson & Co., Larry Robbins of $22 billion Glenview Capital, and Paul Singer of $23 billion Elliott Management, with a cameo appearance from Icahn protégé Keith Meister of $11 billion Corvex Management. It is more than a little ironic that in an era in which hedge funds are on the rampage, attacking bigger and bigger targets—think of Icahn’s successful campaign to get Apple to return more cash to shareholders, or Peltz’s current offensive against DuPont—perhaps the most hotly contested activist war of the new millennium was waged over a retailer that sells 99¢ toothbrushes and $2 detergent to America’s poorest customers.

Click to enlarge.Photographs by Getty Images

For all their sway, the activists revealed plenty of their own imperfections in this saga—and a striking ability to recover from them. Icahn initially backed what became the losing bidder. But through an amazing blend of quicksilver timing, canny button pushing, and a little luck, he proved one of the biggest beneficiaries, collecting a $265.8 million profit in just a few weeks. Similarly, Trian tripped up more than once—but also cashed in big. (For more on the fallibility of hedge funds that agitate for corporate change, see “Actively Mediocre” in Macro.) Whether the activists succeed or fail, one lesson is inescapable today: If you’re a CEO, you have to deal with them.

All the maneuvering, in the end, led to an unexpected result: The upstart Dollar Tree is set to emerge from the merger as a new power­house. With some $20 billion in revenue and around 13,000 stores, it will narrowly surpass Dollar General to become the largest dollar chain and an important alternative to Wal-Mart for millions of bargain-seeking shoppers.


Through interviews with Icahn, Levine, and other key players, as well as legal documents, Fortune was able to assemble a picture filled with new and surprising details. The public twists and turns of the contest have been well covered, but the full behind-the-scenes story of how the dollar-store war was won hasn’t been told until now.

The Dollar chains originated in 1955, when the father-and-son team of J.L. and Cal Turner opened the first Dollar General in Springville, Ky., selling everything for $1 or less. (Today the company is based in Goodlettsville, Tenn., a Nashville suburb.) Four years later Howard Levine’s father, Leon, pondered procuring a Dollar General franchise, but instead invested $6,000 to open his own dollar emporium in Charlotte.

Though they’re called “dollar” stores, today the two biggest players, Dollar General and Family Dollar, sell goods at a range of prices, usually between $1 and $20. The customers, mainly women who head households, typically pick up just a couple of items—for example, toilet paper and a six-pack of Coke—­between big weekly trips to a Kroger or Wal-Mart. For decades Dollar General and Family Dollar have been the Coke and Pepsi of the industry. They sell mostly the same products and are often down the street from each other, in rural towns and low-income areas of big cities. The much smaller Dollar Tree, with headquarters in Chesapeake, Va., came along later, in 1986. It retains the original approach: All items are priced at $1 or less.

It was the financial crisis that brought boom times to the dollar-store industry. The brutal recession and its aftermath attracted tens of millions of new customers in search of bargain prices on household essentials. The three chains each began adding hundreds of new locations annually. Since the end of 2005, the total number of Dollar General, Family Dollar, and Dollar Tree stores has leaped by some 50%, from 16,753 to 25,340.

That explosive growth, inevitably, attracted major attention from Wall Street. A pivotal point came in 2007 when KKR purchased Dollar General in a leveraged buyout. The team that runs it to this day, led by CEO Rick Dreiling, took Dollar General public again in 2009 and proved to be brilliant operators, driving margins and sales per square foot to among the best of any discount retailer.

It was Dollar General’s fantastic performance and the big returns it produced for KKR that attracted Trian. Peltz and his partner Ed Garden, who also happens to be Peltz’s son-in-law, saw lots of unfulfilled potential in Family Dollar. Although its numbers looked good compared with those of most retailers, its margins and sales per store were trailing Dollar General’s, and the gap was widening. Wall Street regarded Levine, who’d inherited the CEO post from his father in 1998, as a mediocre CEO. Peltz and Garden thought they were just the ones to lift Family Dollar to the best-in-class standards established by its larger rival. “We thought we could close the gap,” says Garden. “That was the main attraction.” They bought a stake of about 8% in the company in 2010.

Peltz and Garden had good reason to believe in their own ability. Garden, 53, had joined with Peltz and Peltz’s partner of more than 30 years, Peter May, to start a hedge fund in 2005. That move created one of the biggest forces in activism. Peltz and May were expert at fixing companies but lacked the capital to do big deals. Raising funds from institutions gave them the cash to enter the top tier of activists. In contrast to Peltz, 72, a gravelly voiced, larger-than-life figure and instinctive investor, Garden is a calm, analytical numbers man who describes himself as a “purely economic animal.” The Trian team has a strong record of improving operations at companies in which it invests and serves on the board, including ketchup maker Heinz, mutual fund company Legg Mason, and fast-food chain Wendy’s. Trian specializes in what it calls “operational activism.” It works with existing management to boost day-to-day efficiency, dispatching teams of experts to help improve performance.

But in the case of Family Dollar, the Trian approach failed to reach its operating goals. In spite of Trian’s efforts, things just kept deteriorating. If not for a surprising takeover bid by Dollar Tree at a critical moment, Family Dollar might have become a big failure for Trian instead of another triumph.

By the numbers alone, Family Dollar looked like an easy win to Garden. He figured that adding operational improvement to Family Dollar’s low valuation would spark strong returns. In 2011, Trian bid to purchase the company outright. Its board declined, but the two sides quickly reached a compromise: Garden would join the board, and Family Dollar would adopt a fresh operating plan.

Garden’s expectations about Family Dollar’s returns didn’t come true. A new president and COO, former pharmacy executive Michael Bloom, was brought in. He attempted to increase traffic and lure more middle-class customers by following the drugstore industry’s formula of offering lots of promotions advertised with fliers. One week Family Dollar would post great prices on detergent and garbage bags; a few weeks later it would tout promotions on paper towels and toothpaste. Meanwhile it raised prices on staples. The approach backfired. Family Dollar’s core customers wanted consistent and predictable prices on their household essentials. By contrast, Dollar General stuck with a Wal-Mart-esque “everyday low prices” approach. More and more Family Dollar regulars began crossing the street to shop at Dollar General.

It’s hard to pin the retailer’s problems solely on Bloom. Levine was still CEO—he had designated Bloom his eventual ­successor—and Family Dollar critics say that Bloom never had the freedom to fully run the business. As a board member, Garden signed off on the strategy. Family Dollar is also known for being tightfisted, and Bloom may have been limited in his ability to pay to attract talent. (Bloom did not respond to Fortune’s request for comment.)

By early 2013 the thriving dollar market was beginning to slow down, and the leading sufferer was Family Dollar. “We were opening hundreds of stores a year, yet EBIT was flat,” says Garden. Adds Levine: “It was clear we’d lost our way.” Garden began thinking that the best course might be a sale. Family Dollar was collecting just $180 in sales per square foot annually in its stores, compared with $230 at Dollar General. If the company went on the block, the most obvious buyer would be Dollar General. “I thought that Dollar General could pay a big price, because their great management could bring their metrics to Family Dollar,” explains Garden.

On April 16, 2013, Garden invited Levine to dinner at Aret­sky’s Patroon, a Midtown Manhattan restaurant that’s a favorite of the three Trian partners. The private space was cramped. “It was like dining in a closet,” recalls Levine. Garden told Levine that though he wasn’t giving up on the revival plan, it wasn’t working well, and Levine needed to explore a sale. “He never pushed back on that option,” says Garden. From the evening of their dinner, says Garden, Levine skillfully represented stockholders—of which Levine himself was one of the largest—at first by aggressively pursuing a deal with Dollar General.

Levine had reason to think Dollar General might be interested. In late February, Michael Calbert, Dollar General’s lead director, had called Levine to arrange a meeting. As a KKR partner, Calbert had spearheaded the Dollar General purchase, one of the most successful retail buyouts of the past decade. During their meeting, in a suite at the Ritz-Carlton Hotel in Charlotte, the two discussed a possible merger, and Calbert asked how long Levine planned to remain CEO. Levine responded that even if Dollar General bought Family Dollar, he would want to run the combined companies as CEO. Calbert warned that the Dollar General board would never agree to that.

According to Garden, he was the one who had advised Levine to demand that condition, but strictly as a negotiating tactic. “It was an easy ‘give,’ ” says Garden. “We’d exchange that requirement for a higher price.” Dollar General would later use Levine’s demands to claim that the Family Dollar CEO was driven by ego and that he placed his own desire for power over the interests of shareholders.

After the pivotal session at Patroon, Levine began ardently courting Dollar General. After Levine called repeatedly, Calbert and Dollar General CEO Dreiling invited Levine to meet at the historic Hermitage Hotel in Nashville, near Dollar General’s headquarters, on Oct. 15, 2013. Levine repeated his desire to serve as CEO following a merger. When ­Dreiling and Calbert objected, Levine, in his own words, “dropped those demands pretty dramatically.” Using the Garden playbook, he stated that putting Dollar General management in charge was no problem, as long as it paid a large premium. According to Levine, Dreiling appeared willing and enthusiastic about running a Dollar ­General/Family Dollar combination. “I’m a young 60,” he said, adding that he would remain in charge for a merger and lead the integration process that would follow.

For Levine and Garden the Nashville meeting raised hopes that Dollar General wanted a deal. Both sides agreed that Dollar General could hugely improve Family Dollar’s performance, potentially generating big returns for its shareholders. “I felt some excitement about a merger,” says Levine. “We believed that Dollar General was ready to deal.” But to the surprise of Levine and Garden, Dollar General didn’t follow up. Instead, Levine remained in the uncomfortable role of suitor. He kept calling Dollar General to arrange another meeting. Dreiling and Calbert yawned, first agreeing to meet in November, then canceling that meeting and another set for January. It was “unbecoming how desperate we looked to do a transaction with them,” says Garden. “They kept saying, ‘We think it could be interesting. Let’s meet in a few months. We aren’t interested at this point.’ ”

By December, Garden and Levine had become convinced that Dollar General was hoping to string Family Dollar along and buy it in distress—and far below its price then of around $55 per share. So Garden pressed the Family Dollar board to explore two main options: a sale to another acquirer, and a standalone plan in case no buyer emerged. At what Garden calls a “come to Jesus” board meeting in January 2014, the directors established a committee of four, including Garden, and hired Morgan Stanley to make a list of possible buyers. They also made some strategic changes. Bloom departed, and Family Dollar restored its traditional everyday-low-price policy. The company pledged to close 375 underperforming stores, ending years of rapid expansion.

Family Dollar’s acquisition options appeared bleak. An LBO was a long shot because few private equity firms could raise the $8 billion–plus required. The only likely retail buyer was the one that had apparently walked away: Dollar General. The most probable scenario was that Family Dollar would muddle along as an independent enterprise. It faced a future as an underachiever: For the six months ended March 1, 2014, its profits dropped 23%, and its margins stood at 5%—four points below Dollar General’s—and not improving.

But in mid-March a near miracle occurred. Bob Sasser, Dollar Tree’s CEO, requested a meeting with Levine, saying his company was extremely interested in buying Family Dollar. Dollar Tree was the unlikeliest of buyers. Though extremely well run, it had half as many stores as Family Dollar—5,000 vs. 8,200—and had never acquired more than 1,000 stores. Its locations were situated in suburban markets, catering to middle-class bargain hunters rather than low-income shoppers.

In early April the two companies signed a nondisclosure agreement swearing both sides to secrecy while Dollar Tree studied Family Dollar’s books. On May 14, Sasser offered between $68 and $70 a share for Family Dollar, depending on the exact terms of the deal. The Family Dollar board declined, demanding a higher bid. But $70 was already far above the then-price of around $55—a figure that itself was already inflated by speculation that Dollar General was in the hunt. By early June, Garden and Levine reckoned that a deal was close at hand.

Then Hurricane Carl struck. On June 6, Icahn announced his 9.4% position in Family Dollar. He immediately called Levine. “It was a Friday afternoon,” recalls Levine. “He wasn’t calling to wish me a good day. In fact, it might be interpreted as the opposite.” News of Icahn’s involvement boosted Family Dollar’s stock 13.4% in a single day, to more than $68 per share. Within hours, Icahn, who had bought his shares at an average price of $57, was sitting on a gigantic profit, which would be locked in as soon as Dollar Tree and Family Dollar announced a merger agreement. He just didn’t know it. And the nondisclosure agreement barred Levine from telling him.

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Photograph by Heidi Gutman—CNBC/NBCU photo bank
Photograph by Heidi Gutman—CNBC/NBCU photo bank

At their dinner in New York, Levine asked Icahn whether he’d be willing to sign a nondisclosure agreement, lasting one year, that would ban him from buying more shares or brokering a sale. Icahn refused. Instead, he demanded the right to name three directors who would arrange a sale to a buyer, most likely Dollar General. If Levine refused, Icahn pledged to remove the entire board. “At dinner Levine kept telling me about all these great things he was doing, like adding coolers and selling alcohol,” says Icahn. “You have to be something of a psychiatrist in this business. I read it that Levine never really wanted to go, that he wanted to keep running the company. In my humble opinion, if I’d signed that nondisclosure, he’d have found a way not to do the Dollar Tree deal.” Nor did Icahn take kindly to the poison pill that Family Dollar had adopted to prevent him from buying more shares. “It’s like a guy in a bar who slaps you in the face, then wants to be friends,” says Icahn.

Levine and Garden, meanwhile, were concerned that Icahn’s presence could cause the existing deal to fall apart. Family Dollar had lucked out with Dollar Tree. The fear was that Icahn would push aggressively for board changes and that Dollar Tree could be talking to an entirely new set of directors in 45 to 60 days. “And here we are with a near bird-in-the-hand, on the verge of a deal with Dollar Tree!” says Garden. “We didn’t want anything to derail it.”

Suddenly Dollar General reappeared. Just after the Icahn announcement, Calbert called Levine to suggest a meeting. By now Levine had become concerned that a Dollar General/Family Dollar tie-up might pose serious antitrust risks. Starting in early 2014, attorneys from Cleary Gottlieb Steen & Hamilton had been presenting alarming regulatory scenarios for a combination with Dollar General. In an email to Calbert, Levine proposed that the lawyers from both companies meet to discuss the competition issues and what requirements the Federal Trade Commission might impose to approve a merger.

Calbert apparently viewed the risks as easily manageable. He declined, writing Levine that “getting outside counsel going on antitrust is a bit premature.” (Dollar General did not make its executives available for interviews.) As it turned out, the antitrust hurdles that had given pause to Levine and Garden would become the defining issue of the dollar-store war and the one that would decide its outcome.

Though the two sides couldn’t agree on the urgency of antitrust, Family Dollar and Dollar General did arrange a crucial summit for June 19, 2014. What each side hinted, implied, and hid at that meeting would become a subject of dispute in the months to come. According to Family Dollar, Levine was highly restricted by the confidentiality agreement with Dollar Tree. It barred Levine not just from disclosing that he was negotiating with Dollar Tree, but also from even saying that he was talking to any buyer, named or not. Levine and Garden wanted to keep the deal secret. They feared that if Dollar General found out, it might bid for Dollar Tree instead, and leave Family Dollar an endangered orphan. “We didn’t know what advice Dollar General was getting on antitrust risk,” says Garden. If it thought it would have problems buying Family Dollar, Garden and Levine anticipated, it could bid for Dollar Tree instead, forging an accord with few regulatory issues. In the process it would destroy the Family Dollar/Dollar Tree merger, and leave its biggest competitor in a difficult position.

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Courtesy of Trian Partners

Nevertheless, the board wanted one last chance at getting a big offer from Dollar General. “The synergies were so tremendous that we knew they could pay a good price,” says Garden. He and Levine had also become convinced that Dollar Tree would keep bidding if Dollar General entered the fray.

On June 13, undeterred by Icahn’s announcement, Dollar Tree raised its offer to $72. “It appeared that the deal was far enough along that Dollar Tree would stay in,” says Garden, “even if they had to bid against Dollar General.” Adds Levine: “I got from the beginning that they really wanted to do a deal. Despite what they saw as all the complications gumming up the works, they stuck to it.”

The Family Dollar executives met with their peers from Dollar General in a private dining room at a Charlotte country club where Levine plays golf. “It was like a shivah call or a wake,” Levine says. “They kept saying how sorry they were about Carl, as if they were offering condolences.”

Dreiling and Calbert told Levine that though they were interested, the time wasn’t right for a merger. They acknowledged that their own shareholders were pushing for a deal. A big problem, they argued, was Family Dollar’s high stock price, boosted by speculation about a deal with Dollar General, as well as the Icahn surprise. According to Family Dollar, Calbert said Dollar General might take steps to take the froth out of Family Dollar’s stock by publicly declaring that it wasn’t interested in buying the company. Or perhaps it would announce a big share buyback that would reduce the capital it would have available for an acquisition, quelling merger speculation. Dollar General has never confirmed or denied those alleged statements.

At one point Levine revealed that Icahn had mentioned another, unspecified potential buyer. Levine said that, though he wasn’t sure, he thought Icahn was talking about Dollar Tree. Dreiling dismissed the idea, saying it lacked the financial strength to buy Family Dollar. Before the meeting ended, Calbert asked Levine what he would recommend they do. “I’m embarrassed. I feel like I’m being desperate,” said Levine, according to his subsequent deposition, “but you should make an offer.”

After the meeting Family Dollar pondered writing a letter of complaint—known as a “Bed Bug Letter”—to the SEC, questioning whether the moves that Dollar General suggested to deflate Family Dollar’s share price would amount to stock manipulation. (It’s unclear whether Family Dollar ever sent such a letter.)

As usual, no Dollar General bid was forthcoming. On June 20, Sasser raised his bid to $74.50, and shortly thereafter the Family Dollar board accepted. The agreement negotiated over the next few weeks bound Dollar Tree to purchase Family Dollar, with no shareholder vote required. That provision virtually guaranteed the merger would close. If Dollar General bid for Dollar Tree, it would now have to buy both Dollar Tree and Family Dollar. Given the immense size of that transaction, a merger between Dollar General and Dollar Tree became a virtual impossibility. On the other hand, Family Dollar reserved the right to accept a superior offer from another bidder. So an avenue remained for Dollar General to trump Dollar Tree.

A week later Dollar General announced that Dreiling would retire by the following May at the latest. To Levine and Garden the imminent departure of the successful CEO, who’d described himself to them as a “young 60,” was a shock. They, like most of Wall Street, thought that a new CEO wouldn’t tackle such a transformative deal. Now a deal with Dollar General increasingly looked like a long shot.

Indeed, Family Dollar’s stock languished just after the announcement. A source close to Dollar General, however, says that its motivation was just the opposite. Thinking they had plenty of time to buy Family Dollar, the board wanted to choose a new CEO who could negotiate the deal and see it through full integration, a process that might last many months.

The Dreiling news discouraged even Icahn. “It’s obviously disappointing that you have a very good CEO at Dollar General that’s leaving and that might throw a monkey wrench into a merger there,” he declared on CNBC. He continued to trash Levine, stating on CNBC that he “shouldn’t be CEO.” As he told Fortune, Icahn planned to eventually bid for Family Dollar if Dollar General stayed on the sidelines. He was confident his offer would have forced Dollar General to finally make its move, and outbid him in the process. “That’s how much they wanted it,” he says.

As it turned out, it was the Dollar Tree deal that finally roused Dollar General. Dollar General’s leaders were absolutely astounded by the news. Now the chance of buying Family Dollar at a distressed price was gone. Still, investors such as Keith Meister, who owned Dollar General stock, and John Paulson, who held positions in both companies, exhorted them to make a bid.

On Aug. 18, 2014, Dollar General announced an offer for $78.50—leapfrogging Dollar Tree’s bid. In a letter to Levine, Dreiling said he was “surprised and disappointed to find out about” the Dollar Tree deal and accused Levine of unfairly hiding that the Dollar Tree pact was imminent. As part of the campaign, Dreiling announced he was effectively “un-retiring,” and would stay on as CEO until the middle of 2016 to oversee the integration of Dollar General and Family Dollar if a deal was reached.

Dollar General then went after Levine. Referencing the Family Dollar CEO’s earlier demand to retain control if the two companies merged, Dollar General argued that it was presenting a better proposal to Family Dollar’s shareholders, “although perhaps not for Mr. Levine personally.”

The Family Dollar board shocked many investors by rejecting the $78.50 bid from Dollar General and on Sept. 5 spurned another offer for $80. That bid represented an extra $600 million to shareholders. So why would any board reject an offer that, at least on paper, looked so much better? For weeks that’s the question activists kept throwing at Family Dollar. But the board’s decision made sense. Though the Dollar General deal looked richer, the chances it could actually buy Family Dollar looked low because of antitrust concerns—while the Dollar Tree deal was a sure thing.

The previous May, Family Dollar’s lawyers at Cleary Gottlieb had told the board that a combined Dollar General/Family Dollar would need to divest several thousand stores to win clearance from the Federal Trade Commission. Yet in its merger proposal, Dollar General offered to shed just 700 stores, later raising the ceiling to 1,500. Cleary Gottlieb estimated that the 1,500 limit gave the merger just a 40% chance of winning approval. As a result, Family Dollar refused to engage in negotiations with Dollar General, since the board found its offer highly unlikely to close. The 1,500-store limit, says Garden, “made me more skeptical about their intentions, since they have very sophisticated lawyers.”

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Photograph by T. Ortega Gaines—The Charlotte Observer

As it turned out, the Cleary analysis was correct. The firm accurately predicted the methodology the FTC would use to reach the crucial divestiture number. As Cleary forecast, the FTC looked at the competition between discounters in thousands of markets where Dollar General and Family Dollar compete. Dollar General argued that Family Dollar’s pricing had no influence on its own pricing strategy. Instead, Dollar General maintained that it used Wal-Mart as its primary benchmark.

The FTC didn’t see it that way. It determined that in markets where Family Dollar and Dollar General competed, Family Dollar prices were lower than when Wal-Mart was the main competition. As a result, the FTC feared that the prices of today’s Family Dollar stores would rise if they came under the same ownership as Dollar General.

When Family Dollar stood firm, Dollar General announced it was taking the fight directly to Family Dollar’s shareholders by launching a tender offer at $80. That was theater. Regulations governing tender offers bar a bidder from purchasing shares before receiving antitrust approval. Still, Dollar General had a lever for destroying the Dollar Tree deal and perhaps winning Family Dollar for itself; that opportunity was to persuade the activists and other big shareholders to vote down the Family Dollar/Dollar Tree merger, scheduled for Dec. 23.

Indeed, some activists were furious with Family Dollar. Its stock was trading well above Dollar Tree’s $76.50 offer, meaning that most investors thought Dollar General would win. Proxy advisory firms Glass Lewis and ISS both recommended that Family Dollar shareholders vote against the Dollar Tree merger and force Family Dollar to also negotiate with Dollar General. (Glass Lewis and ISS later changed their positions.)

In mid-October, Elliott Management announced that it had purchased 4.9% of Family Dollar shares and launched a proxy battle to force Family Dollar to enter into negotiations with Dollar General. Elliott was so confident of success that it purchased its shares in the high-70s. By mid-December, Dollar General had gained strong support for its higher bid, and it looked as though Family Dollar would lose the shareholder vote. “They were kicking our butt,” says one participant.

The risks of a loss were great. If Dollar Tree disappeared and Dollar General failed to win antitrust approval, the market would once again value Family Dollar as a struggling standalone. Its stock might be worth $35 or $40, a loss of half its value.

To win over investors, Levine, Garden, and Brian Byrne, an attorney for Cleary Gottlieb, embarked on a road show to convince the activists and big institutions that the Dollar General bid was likely to fail despite the higher price. In the meetings Garden’s status as a fellow activist and big shareholder was crucial. He emphasized his stance as an “economic animal,” stressing that shareholders should take not the highest price but “the highest price with certainty.” The team found a ready listener in Paulson. “Paulson got it quick,” says Levine. Informed that even the Dollar Tree deal was taking months to review, Paulson said, “Then imagine what’s going to happen with Dollar General!” Unable to secure the necessary votes by Dec. 23, Family Dollar secured a postponement until Jan. 22, 2015.

The road show won over many investors. But even in mid-January, Family Dollar still wasn’t sure of victory. In most deals the FTC declines to give any indication of what its analysis is showing before it reaches a final decision. But Cleary Gottlieb convinced the FTC lawyers that a landmark shareholder vote depended on their numbers. The FTC attorneys even agreed to read, and tacitly approve, a highly detailed press release from Family Dollar stating that the FTC found that prices would rise at Family Dollar stores in thousands of markets in the absence of an independent Dollar General outlet in the same neighborhood. Family Dollar believed that Dollar General was getting similar feedback from the FTC but not disclosing it. So it sent a letter to the SEC urging the agency to compel Dollar General to reveal the status of its talks. On Friday, Jan. 9, the SEC wrote a letter to Dollar General requiring it to disclose any updates, good or bad, from the FTC.

The decisive stroke came the next day. A lead FTC attorney set times for Family Dollar and Dollar General to place separate calls in the early evening. Around 6 p.m., lawyers from Cleary placed the first call. The FTC lawyer said that between them, Family Dollar and Dollar General would need to divest between 3,500 and 4,000 stores to secure the FTC’s approval. Minutes later Dollar General received the same news. In effect, the regulators would require that Dollar General sell the equivalent of as many as half the stores it was buying, probably at fire-sale prices. That was clearly a dealbreaker.

The following Wednesday, Dollar General essentially conceded defeat (but still assailed the FTC for relying “heavily on an untested theoretical model”). On Jan. 22, Family Dollar’s shareholders voted overwhelmingly to approve the merger with Dollar Tree. When the deal closes, Levine will pocket around $700 million, while Trian books a profit of around $400 million.

Despite the defeat, Dollar General just might salvage something from the dollar-store war. The FTC will require that Family Dollar and Dollar Tree sell some 300 stores to win approval. Somebody in the discount retail business will buy them. Would it be completely outrageous to predict that that someone will be Dollar General?

Icahn’s postmortem is instructive. “Dollar General should have bid much earlier,” he says. “Once I got in, Family Dollar was in play. The chance that Dollar General could get it cheap was gone.” Just like dollar-store shoppers, Icahn knows to grab a bargain when he sees it.

This story is from the May 1, 2015 issue of Fortune magazine.