Consumer

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

According to the ever-optimistic Jim McCarthy, the outgoing chief executive of Poundland, the discount chain offers amazing products at amazing prices that customers want to come in and buy.

Looks like Steinhoff, the South African retail group, thought the price of the whole business was pretty amazing too. It snapped up Warburg Picus's entire holding for 195 pence per share, or 80 million pounds ($113 million) on Tuesday. Now that it's built up its stake to 23 percent, it's considering an offer for the rest.

The price it has paid for its shares is hardly a pound, but it is still about a third cheaper than Poundland's 300 pence per share debut price in early 2014.

Since the offering, Poundland shares have significantly underperformed the FTSE All Share Index and rival retailers, as the company has faced a vicious supermarket price war, undermining its competitive position, as well as its takeover of 99p Stores.

Moreover, competition in the discount sector is rising -- not least from Christo Wiese, the South African entrepreneur who is Steinhoff's biggest shareholder, who is quietly building up another British discount group, Pep & Co., which focuses on clothing. 

Acquiring Poundland would expand this footprint further. Steinhoff wants to be a budget retailer for the masses -- think a European Wal-Mart. Poundland's customer demographic fits with its target market.

As for Poundland, life isn't getting easier any time soon. There's also a Brexit wrinkle. If a vote to leave the European Union leads to a sharp drop in the pound, that will squeeze U.K. retailers that buy goods from Asia. Though Poundland is experimenting with multiple price points in some of its shops, overall it has limited ability to put up its prices.

Pounding
Shares in Poundland have been hit by delays in the purchase of 99p Stores and competition
Source: Bloomberg

Poundland trades on a forward price to earnings ratio of about 15 times, at a discount to rival B&M. That's deserved, given Poundland's performance: Pre-tax profit fell 84 percent in the year to March 27. 

McCarthy said Thursday that big drop reflected work to absorb the 99p store chain, and the prospects for Poundland should improve now that the company is unified under one umbrella. But unified or not, the challenges on many fronts are substantial. 

Steinhoff might be able to do better. Wiese might be able to improve returns on Poundland through synergies with his Pep & Co. clothing chain or his Guess How Much! discount stores. The constraint that prices shouldn't exceed one pound could be avoided simply by rebranding the whole chain. 

Steinhoff could afford to pay 250 pence per share and still be accretive to earnings. The forward price to earnings multiple would still be around Poundland's historical average of 18.9 times.

But so far, Steinhoff appears to be the only one who's spotted the bargain. That's a change from its recent forays, when it barged into Sainsbury's pursuit of Home Retail Group, only to withdraw, and then became embroiled in a protracted bid battle over Darty, losing out again.

Steinhoff wants to remain the only shopper in the store. But surely the perennially upbeat McCarthy will be hoping his amazing value encourages others to come in and buy.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Andrea Felsted in London at afelsted@bloomberg.net

To contact the editor responsible for this story:
Jennifer Ryan at jryan13@bloomberg.net