6th Aug 2015 12:24
LONDON (Alliance News) - Jefferies says its expects the UK Competition and Market Authority to approve Poundland's acquisition of 99p stores and upgrades the FTSE 250-listed discount store operator to Buy from Underperform.
"Having followed the latest iterations in the CMA process we believe that even if the CMA reiterates its strict definition of Poundland's competitor set they may relax their view on potential competitor store openings," Jefferies analyst Caroline Gulliver says.
"So we believe in the worst case Poundland will have to divest 80 99p stores, as suggested in Phase I, and more likely fewer. In our base case deal scenario we assume Poundland can keep 200 99p stores," the analyst adds.
Gulliver says Jefferies' latest UK consumer survey results means there will be limited revenue synergies. The survey found that only a net 3% of customers expect to spend more at Poundland if they buy 99p stores. More generally with 84% of 99p store customers already shopping at Poundland customers are well aware of the merits of both offers.
However, the analyst finds significant cost synergies between the two companies, which make the deal worthwhile.
"We estimate that buying and cost savings could be GBP15-20 million, which on a base of only GBP44 million [earnings before interest and taxes] leads to a 30% increase in our (17% below consensus) 2017 [earnings-per-share] forecast. Thus we see the mid-late August provisional findings and possible remedies statement from the CMA as a key catalyst for the shares," Gulliver says.
The analyst believes the stock can rally back to 400.00 pence assuming the CMA's findings are no worse than it was in April.
The CMA in April said the merger between Poundland and 99p Stores will be referred for an in-depth investigation unless acceptable concessions are offered by the two groups. The competition watchdog said found the two are each others' closest competitors and that after the deal, they would only face significant competition from one other national operator, Poundworld, and from discount retailers such as B&M European Value Retail SA, Home Bargains, Wilko and Poundstretcher.
Jefferies raises its price target to 400.00 pence from 260.00p.
Poundland is one of the best performers in the FTSE 250, trading up 2.0% at 353.20p.
By Neil Thakrar; [email protected]; @NeilThakrar1
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