A merger of two of Britain’s biggest discount-retail chains faces an “in-depth” antitrust investigation unless the companies pledge to safeguard local competition, the U.K.’s Competition and Markets Authority said Thursday.
Poundland Group Plc agreed in February to buy 99p Stores Ltd. for 55 million pounds ($84 million) to boost its presence in the booming U.K. industry.
Yet in a preliminary examination the CMA said the deal “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.”
It’s a “struggle to fathom” why a business that would command less than 0.5 percent of the U.K. retail market is attracting such a high degree of scrutiny from the CMA, John Kershaw, an analyst at Exane BNP Paribas in London, said in a note. “The deal could still proceed and terms be renegotiated, but this is a negative surprise.”
This scrutiny is due partly to the CMA’s “surprising” decision to classify so-called single-price general retailers as a distinct market, Charles Allen, a Bloomberg Intelligence analyst said. “Almost all the items these stores sell are sold by a much wider group of retailers.”
Poundland’s offer for its smaller competitor shows the attraction of discount retailing in the U.K. as an increasing number of shoppers switch to bargain stores with fixed prices. This change has contributed toward a price war in the U.K. grocery market, as supermarkets strive to win back customers. Poundland, which has almost 600 outlets, has said it sees potential for more than 1,000 stores in the U.K.
Poundland said in a statement that it’s “carefully considering” the CMA’s announcement and will make a further announcement in due course. The companies have until April 16 to offer proposed remedies.
The stock declined 1.2 percent to 356.8 pence at 2 p.m. in London, with Poundland shares now trading below the level they reached when the deal was announced. Earlier, the shares fell as much as 5.6 percent when the CMA’s decision was announced.
Poundland serves an average of 5 million customers a week from its outlets, while 99p Stores has more than 2 million weekly customers and about 250 stores.