Poundland ploughs ahead with 99p Store deal with full CMA probe

Discount retailer Poundland has decided to plough ahead with its takeover of rival 99p Stores and has agreed to the UK competition regulator's demand for a full investigation.

The Competition and Markets Authority on Friday afternoon announced the £55m merger will be referred for a Phase II review, which could take up to six months, after a Poundland letter requesting a standard three-week suspension of the review.

The company's other option would have been to offer to sell off stores or change its pricing.

"After careful consideration, Poundland has decided not to offer remedies to the CMA," the FTSE 250 company said in a statement on Friday.

Last week the CMA threatened to carry out a full investigation or even block the deal unless Poundland and 99p Stores "offered acceptable undertakings" to address its concerns over competition, in particular over 92 of the stores that would be acquired.

It said its initial view was that the merger would lead to "a substantial lessening of competition in 80 local areas where the companies currently overlap" as well as 12 further areas where stores were due to open.

Sheldon Mills, a director at the CMA, said: "After the transaction, Poundland will no longer face competition from its closest rival, and following our initial investigation, it is unclear whether the constraint posed by remaining retailers is sufficiently strong to mitigate our concerns over how the transaction might affect choice, value and service for shoppers."

commentators said if the company knuckled down to the “long-hard slog” of an inquiry, it could cement its supremacy in the discount niche

But analysts and media commentators had urged the company to persist with the deal.

Clive Black at Shore Capital said Poundland’s management were "experienced dealmakers".

The Sunday Times' Inside the City column said if the company knuckled down to the “long-hard slog” of an deeper inquiry, it could cement its "supremacy" in a niche that has blossomed amid continuing economic austerity.

The CMA will begin its in-depth investigation to decide whether the merger raises substantial competition problems that need to be remedied, it said, with a final decision to be published by 2 October.

Shorecap admitted “dismay” at the CMA’s belief that the merger would result in lower competition

A decision will be made by a group of independent panel members supported by a case team of CMA staff.

'Dynamic and competitive' discount market

Poundland chief executive Jim McCarthy had at the weekend admitted he was "disappointed and surprised" by the regulator, he told the Sunday Telegraph, "because my view is that we operate in a very competitive and changing retail environment".

This was echoed by Shorecap's Black, who admitted "dismay" with the CMA’s belief that the merger would result in a diminishing of competition as Poundland "is an excellent retailer offering a much more potent and high quality offer" to its customers in comparison to 99p.

He pointed to an "extremely dynamic and competitive" discount market in the UK, with both the general merchandise and fast moving consumer goods elements of the market in the UK having an "extensive and, if anything, growing choice" with the expansion and evolution of grocery limited assortment retailers (LADs) such as Aldi, Lidl and Netto, and general merchandise high street value retailers such as B&M Stores, Home Bargains, Poundstretcher, Poundworld and Wilko.