Poundland ‘could walk away’ from 99p Stores deal

By Michael Stones contact

- Last updated on GMT

Poundland may ditch its takeover of 99p Stores, after the CMA ruling
Poundland may ditch its takeover of 99p Stores, after the CMA ruling
Poundland could ditch its £55M deal to take over 99p Stores, after the Competition & Markets Authority (CMA) pledged to fully investigate the acquisition unless it received assurances that shoppers would not lose out, according to City analyst Shore Capital.

“Walking away from the deal”,​ was one of three options predicted by analysts Clive Black and Darren Shirley, following the competition watchdog’s interim ruling yesterday (April 9).

The other two options open to the discount retailer ​once described by the analysts as ‘Woolworths with food’ ​ were identified as: trying to provide suitable remedies to meet the CMA’s concerns and proceeding with a full (phase two) investigation.

The analysts expressed surprise and disappointment at the interim (phase one) ruling that the takeover was likely to lessen competition in the discount sector “despite our many years of experience trying to understand CMA thinking …”.

‘Substantial lessening of competition’

Of particular concern, they said, was the watchdog’s contention that: “The transaction gives rise to a realistic prospect of a substantial lessening of competition in 80 local areas where the companies currently overlap – and in a further 12 areas where they will be competitors in the near future.”

Poundland and 99p Stores have until April 16 to offer an undertaking that is acceptable to the regulator that the deal will lead to no loss of competition for bargain-hungry shoppers. If no such undertakings were offered or accepted, the CMA will refer the proposed acquisition for a phase two investigation, which will take up to 28-weeks to complete.

Management at Poundland had much to reflect upon, said Black and Shirley, as the 80 stores highlighted by the CMA represented about one-third of 99p Stores’ estate. 

‘If it wasn’t so serious, it could be funny’

Poundland’s three options:

  • Seeking to provide suitable remedies to meet the CMA’s concerns.
  • Proceeding with a Phase II investigation.
  • Walking away from the deal.

“If it wasn’t so serious, it could be funny,”​ they added, referring to the CMA’s observation that: “Without competition form 99p Stores, there is the possibility that Poundland may have the incentive and ability to deteriorate its offer in these areas to the disadvantage of customers that have come to rely on their offer.”

Why would a discounter, or any other business in an intensely competitive industry, admired by its customers and supported by its shareholders, have any incentive “to deteriorate its offer”​ to the disadvantage of new customers following an acquisition, questioned Black and Shirley?

“To our minds that view is the total antithesis of what the discount market is about in the UK, why Poundland is so successful and why, we presume, it believes it can deliver a superior customer response through 99p outlets,”​ they added.

Responding to the CMA’s ruling, Poundland said it was considering carefully its announcement and the full detail behind it and pledged to make a further announcement in due course.

Shore Capital acts as broker to Poundland and does not make recommendations on house stocks.

Read more on the CMA ruling here​.

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