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Poundland (PLND) is set to spend considerably more than its eponymous fixed price point after agreeing to acquire rival discounter 99p Stores for £55m in a cash-and-stock deal.
CEO Jim McCarthy said the transaction was good for both businesses and would benefit customers and shareholders. “Through working together, Poundland will improve choice, value and service for 99p Stores’ customers, bringing Poundland’s proven know-how and range to 99p Stores. We also believe that we can improve the performance of the 99p Stores estate and generate further value for Poundland’s shareholders.”
The acquisition is conditional on the green light from the Competition & Markets Authority (CMA), with Poundland already in talks with the regulator. The process is expected to take at least two months.
Founded in 2001 by Nadir Lalani, 99p Stores has grown its estate to 251 outlets – trading as 99p Stores and Family Bargains – serving more than two million customers a week. Sales in the year to 1 February 2014 totalled £370.4m with underlying earnings of £6.1m.
If the deal goes ahead, Poundland said it would enhance earnings per share for its shareholders.
House broker Shore Capital welcomed the move noting the takeover would consolidate Poundland’s position in the discount market and potentially ease some pressure on future site acquisitions. However, analyst Darren Shirley did point out that 99p Stores historic margins are somewhat below Poundland’s – 1.6% compared with a forecast 5.4% for the 2015 financial year. But recent tough trading conditions for 99p Stores meant the deal made “economic sense” for the vendor and investors in Poundland, he added.
And investors certainly acted with delight as shares in Poundland jumped 8% to 386.5p as the market opened.
The only question remaining is will Poundland raise its prices for the acquired network of stores from 99p or come down from its £1 price point.
Morning update
TATE & Lyle has issued another profit warning - its third in a year - this morning as its bulk ingredients division was affected by lower US sweetner volumes and pressure in ethanol and EU bulk sweetner markets in its third quarter. The sugar group said the weakness looked set to continue in the final three months of the financial year pushing down profit expectations to below the £230m - £245m range stated in September.
The news hit Tate & Lyle’s (TATE) share price hard, with it plunging by almost 13% so far to 583p. Apart from Poundland’s meteoric rise, Conviviality Retail (CVR) has bounced back followed a decline after news of its acquisition of GT News (up 4.2% to 137p) and McBride (MCB) continued to climb following its half-year results yesterday in which profits doubled as it cut costs (up 3.5% to 90p).
Yesterday in the City
There was little doubt about the FTSE’s biggest riser yesterday, as drinks can manufacturer Rexam (REX) leapt 21% on takeover talk.
Rexam admitted it was in talks with rival beverage can maker – US company Ball Corporation – over a deal which values Rexam at 610p per share. An offer, which has yet to be formally made, would consist of up of two-thirds cash and the rest in equity. Rexam opened at 455p yesterday, before climbing 11% higher of media speculation in the morning and further still once it confirmed the deal talk.
Also on the up was private label household goods manufacturer McBride (MCB), which saw first half profit before tax rise by a quarter to £7.3m despite a 4.1% dip in revenues (albeit a 0.2% sales increase on a constant currency basis). Investec analysts wrote: “McBride has started to rebuild profits and margins in a market which is providing some top line challenges”. The shares ended the day 3.5% higher at 90p.
Conviviality Retail (CVR) also had a good day after receiving a ‘buy’ recommendation from broker WH Ireland. In the week the group bought convenience chain GT News, WHI gave it a price target of 190p, commenting: “Whilst the market perception may be that the business is ex-growth and could be impacted by greater competition in the wider grocery sector, we believe that Conviviality is in fact well positioned to grow earnings over the coming years.” Conviviality rose 4.9% to 138p yesterday, having fallen from as high as 195p a year ago.
Another of the week’s strong gainers was brought back down to earth unceremoniously on Thursday. Ocado (OCDO) had been 4.8% up at 431p on Wednesday after posting its first ever profit on Tuesday and hinting at imminent international expansion plans. However, a ‘sell’ downgrade by Deutsche Bank today sent the shares crashing back by 5.1% to 409.3p – below the level it was trading at before Tuesday’s annual results were issued.
Cigarette firms British American Tobacco (BATS) and Imperial Tobacco (IMT) were also on the way down yesterday – falling by 1.2% to 3,689p and 1.8% to 3,026p respectively.
GlaxoSmithKline (GSK) had a better day after outlining slowly improving results on Wednesday. The UK-listed pharma giant rose 1.7% to 1,500.5p.
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