The combined brands will generate sales topping $18bn and will operate around 13,000 stores in North America, pushing Dollar General - which has 11,300 locations - into second place in the dollar store rankings.
Dollar Tree, which is based in Chesapeake, Virginia, mostly operates in suburban locations where it sells everything for $1 or less; whereas Family Dollar, which is based in Matthews, North Carolina, operates in urban and rural areas and sells items at multiple price points.
In a statement announcing the deal, which has been unanimously approved by the board of directors of both companies and is expected to close by early 2015, Dollar Tree said it plans to retain and grow each brand.
Dollar Tree CEO Bob Sasser said he expected the deal would generate annual synergies of $300m: "We plan to leverage best practices across both organizations to deliver significant synergies, while we accelerate and augment Family Dollar's recently introduced strategic initiatives.
"Combined, our growth potential is enhanced with improved opportunities to increase the productivity of the stores and to open more stores across multiple banners."
Howard Levine, CEO of Family Dollar, will remain with the company and report directly to Sasser.
Click HERE for full details.