Poundland's offer to buy rival 99p Stores for £55m is facing an in-depth investigation by the competition watchdog, amid concerns reduced competition will lead to reduced quality, fewer promotions and store closures.
The Competition and Markets Authority (CMA) said it believes the tie-up could create "a realistic prospect of less competition" in 80 local areas - and an additional 12 areas where they will be competitors in the near future.
If the deal goes through, it will leave the new group with just one main competitor, Poundworld, alongside other discount retailers such as B&M, Home Bargains, Wilko and Poundstretcher.
Sheldon Mills, senior director of mergers at the CMA and decision maker in this case, said:
After the transaction, Poundland will no longer face competition from its closest rival, and following our initial investigation, it is unclear whether the constraint posed by remaining retailers is sufficiently strong to mitigate our concerns over how the transaction might affect choice, value and service for shoppers
Without competition from 99p Stores, there is the possibility that Poundland may have the incentive and ability to deteriorate its offer in these areas to the disadvantage of customers that have come to rely on their offer.
Poundland made the £55m offer for 99p Stores in February. The company has 251 branches, which together produce £370.4m in annual sales and serve around two million customers a week.
Shares in Poundland were trading down around 2.6 per cent to 351 pence per share this afternoon.