Poundland takeover of 99p Stores wins CMA approval

The UK competition regulator has provisionally given approval for Poundland Group to acquire rival 99p Stores Ltd.

The Competition and Markets Authority gave provisional clearance for the deal, which will create a combined network of around 800 UK stores but, crucially, is not expected to result in reducing competition for consumers due to the thriving competition in the sector and so will require no remedies such as store sales.

The CMA will now complete its second phase of further consultation, ending 16 September and with the publication of a full review in October that see a change of policy and Poundland forced to sell one or two stores in areas where competition is adversely affected.

At a national level, the regulator noted that there was plenty of competition for Poundland, as it competes with a number of retailers across the areas in which it operates and only a third of its stores face competition from 99p.

Philip Marsden, chair of the CMA inquiry group, said: "There has been a significant rise in prominence of value retailers for UK shoppers. Our evidence indicates that customers are primarily attracted to Poundland and 99p because of their affordability and see them as good alternatives to each other. Nevertheless some customers can and do switch to other types of discount retail chains."

Poundland chief executive Jim McCarthy welcomed the provisional clearance of the deal, adding the management "continue to believe that the acquisition of 99p will be great for customers and for shareholders alike".

The company is anyway on track to organically open 60 net new store in the UK and Ireland in the 2016 financial year, with 40 net openings by the end of the first half.

The 99p Stores estate numbers roughly 120 stores in Southern England and 27 larger store estate which trade under the Family Shopper fascia, with a warehouse and distribution centre in Northampton also included in the transaction.

Broker Canaccord said its base case scenario, based on the acquisition leading to a modest 15% sales density improvement and 10% store closures for 99p Stores, delivered an estimated 13% pro forma full year 2016 EPS earnings enhancement.

"This was in anticipation of the potentially substantial earnings enhancement arising from Poundland increasing the much inferior EBITDA margin achieved by 99p Stores."

House broker Shore Capital welcomed the deal for its potential to materially accelerate Poundland’s growth in Southern England and retail parks but left forecasts unchanged for now.

Analyst Darren Shirley reminded that McCarthy had said at the time of recent results that the acquisition will, through the change in the competitor landscape, increase the potential number of UK stores from the 1,000 outlined at the time of the company's March 2014 IPO to circa 1,250.

"Poundland will both consolidate its leading position in the discount market whilst potentially easing some pressure on future site acquisitions."