Poundland’s (PLND) takeover of the 99p Stores chain will be referred for an in-depth investigation “unless acceptable undertakings are offered”, the Competition and Markets Authority has confirmed today.

The UK competition regulator said that its initial investigation found that the “transaction gives rise to a realistic prospect of a substantial lessening of competition” in 80 local areas where the companies currently overlap and 12 locations they will overlap in the near future.

The CMS said that the two retailers can be distinguished from other value general merchandisers since they sell nearly all products at a single price point.

“The CMA found that the parties are each other’s closest competitors and that after the transaction they will only face close competition from one other single price retailer with national scale, Poundworld, and from other discounted retailers such as B&M, Home Bargains, Wilko and Poundstretcher,” the CMA said.

“The CMA found that the loss of competition between the companies may lead to a worsening of their offer locally, through a reduction in quality, fewer promotions or closure of their stores.”

As a result the CMA said the merger will face an more in-depth “phase 2” investigation by an independent group of CMS panel members “unless the parties offer acceptable undertakings to address the CMA’s competition concerns in a clear-cut manner”.

Sheldon Mills, CMA Senior Director of Mergers and decision maker in this case, commented: “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 released a short statement that read: ”Poundland is carefully considering the CMA’s announcement, together with the full detail behind it and will make a further announcement in due course.”

Poundland’s shares plunged to 340.7p soon after the news - 6.6% lower than its opening price of 364.8p this morning. However, the shares rapidly recovered to 363.8p before settling down at just under 360p (currently the shares are at 357.5p, 1% down on this morning’s opening price).