The price tag does look very reasonable. 99p Stores made underlying cash profit of £6.1m for the year to 1 February 2014 (the latest period for which accounts are public), so an enterprise value of £55m works out as a multiple of nine times. Poundland's current share price gives it an enterprise value of £1.04bn, which is 19 times the £54m in underlying cash profit it made for the year to 30 March 2014.
As for synergies, 99p Stores' wafer-thin margins offer a clear opportunity. The £6.1m in 2013-14 profit was based on revenue of £370m, giving a margin of just 1.6 per cent. If Poundland can raise that to match its own of 5.4 per cent margin, profit would more than triple. Jim McCarthy, the chain's down-to-earth chief executive, attributes 99p Stores' lower profitability partly to its sales mix, which includes more lower-margin food products. He says shifting the balance towards so-called general merchandise should make a big difference.
There should also be the usual scope for boosting margins through scale benefits. These play a particularly important role in a discounter's business model, the secret of which is often bulk purchasing. "It's helpful to offer suppliers growth," says Mr McCarthy. And the merger should also enable Poundland to cut out a layer of management, reducing administrative expenses.
But there are a few snags that make the City's reaction to the deal rather too euphoric for comfort. First, it remains subject to approval by the Competition & Markets Authority (CMA). Poundland is the largest single-price retailer in Britain; 99p is the second-largest. Anti-trust watchdogs don't usually look kindly on mergers between the two market leaders in a sector.
Of course, it's not that simple: Poundland sells such an eclectic range of goods, from pasta sauces to reading glasses, that it competes in a much broader arena than fixed-price or even discount retail. Mr McCarthy is keen to point out that the two companies together would control just 0.4 per cent of the £375bn UK retail market. Still, the CMA could feasibly force Poundland to sell or close some outlets, reducing the deal's value.
Second - and more worryingly - the discount sector's best days may be over. Mergers are usually associated with slowing growth. Perhaps the Lalani family, which controls 99p Stores, is selling out because it sees that the UK discount retail sector is approaching maturity. A report this month by Fung Business Intelligence Centre, a New York research firm, found that "the segment looks to be getting crowded". The top six companies now have nearly 2,200 outlets between them, with ambitious plans to open more.
Moreover, real disposable incomes are now rising for the first time in nearly seven years. That could encourage consumers to trade up and once again favour the convenience of supermarkets over the value of discounters. Like-for-like growth at Poundland was nearly 5 per cent in the six months to last September, but has since slowed markedly.
Much has been written, and with much ill-concealed delight, about supermarkets' plunging market shares and a shift in British spending habits in favour of discounters. But in reality we do not yet know whether the shift is structural - whether British shoppers are becoming more German, say - or the cyclical result of the unprecedented period of falling consumer incomes that has just ended.
If it's the former, shares in Poundland, on 31 times this year's profits, may deserve their heady premium. After all, Shore Capital is forecasting earnings growth of 20 per cent - even without the earnings-boosting bolt-on of 99p Stores - and shares in B&M European Value Retail (BME), the only other listed discounter, are similarly rated. But if the trend is cyclical, investors should take their money and run. Sainsbury stock (SBRY), on 11 times and yielding about 5 per cent, would be the obvious refuge.
