Poundland may have to sell up to 80 stores to win approval from the competition watchdog for its £55m takeover of 99p Stores.
The Competition and Markets Authority (CMA) said on Thursday that an initial investigation into the planned merger of the two low-price chains had found that it would lead to “a realistic prospect of a substantial lessening of competition” in 80 areas where the two chains overlap.
Sheldon Mills, senior director of mergers at the CMA, said: “Without competition from 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.”
The CMA added that the two chains’ store opening plans showed there were a further 12 areas where Poundland and 99p Stores would be competitors in the near future.
The watchdog said it would launch an in-depth investigation into the takeover unless Poundland put forward suitable undertakings to tackle the competition issues by 16 April.
Analysts said the most likely remedy was the closure of stores in the 80 areas where there were concerns about competition and an undertaking to not open outlets in the further 12 locations.
“Given how few retailers are opening space, this could cost the company in lease assignments/break fees and it shrinks the size of the deal by one-third,” said Charlie Muir-Sands, an analyst at Deutsche Bank.
Poundland said it was “carefully considering the CMA’s announcement, together with the full detail behind it and will make a further announcement in due course”. The company is due to issue a trading update on Tuesday and analysts are hoping it will provide more news on its plans regarding 99p Stores.
The retailer could challenge the CMA’s finding that its merger with 99p Stores would lessen competition because they both serve customers looking for “convenience and value at low and consistent prices”.
It could argue that many other stores, such as supermarket chains, sell the homewares, gardening equipment, stationery and groceries that the merging chains stock. But the recently listed business may not want to become embroiled in an uncertain six-month investigation process that would gather evidence from across the industry.
The CMA said the merger would mean Poundland, which has about 600 outlets, faced only one other single-price retail competitor on a national scale – Poundworld.
However, the competition watchdog acknowledged that the retailer also had competition from discount chains B&M, Home Bargains and Poundstretcher.
By Sarah Butler - The Gaurdian