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Poundland buoyed by takeover hype

South African group Steinhoff has got the discount chain in its sights after a number of failed takeover attempts this year
June 15, 2016

Steinhoff is back on the hunt and this time it's after bargain basement chain Poundland (PLND). It marks the South African group's third takeover attempt this year, as it clamours after a foothold in the European retail market. In January it created a love triangle between Argos owner Home Retail Group (HOME) and J Sainsbury (SBRY). The grocer eventually won that fight, and Steinhoff moved on to pursue French electricals retailer Darty (DTY), which had already agreed basic terms with larger French rival Fnac. Again, Steinhoff left empty handed.

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Eyebrows were first raised following an unusual movement in the Poundland share price, up more than a fifth in just a matter of hours on 14 June. By the following morning, the reason was clear, although Poundland bosses have urged shareholders not to take any action given the lack of a formal bid.

But why is Poundland such an attractive target for Steinhoff? The integration of its 99p Stores acquisition hasn't gone smoothly, and a slump in like-for-like growth across the existing estate means the share price has floundered accordingly. It hasn't been helped by a disappointing macro picture either, which has been exemplified by lower high street footfall figures and changing consumer spending habits. John Stevenson, analyst at Peel Hunt, puts it simply: "The market has lost faith in the Poundland story."

This means plenty of people have probably forgotten about Poundland's fledgling European growth businesses. New outposts in Ireland and Spain are small at present - the Spanish trial only has 10 stores up and running - but it's thought there's room for a 500-strong estate and €40m (£32m) contribution to cash profits. Similarly, a new distribution centre in Ireland could double store numbers there, too.

At the time of writing, Poundland results for the year ending March 2016 are due in less than 24 hours. Peel Hunt believes its current top-of-the-range forecasts "could come under pressure" depending on those numbers, but it also believes shareholders won't let Poundland go for less than 15 times enterprise value to cash profits. At present, the shares trade at around half that value.