Analyisis: Why do US investors want to bag a value chain like B&M Bargains?

US private equity investors Blackstone, BC Partners, KKR, Bain Capital and Clayton Dubilier and Rice are all named as going through to second round bids for the value variety chain.

It would be a serious investment with B&M being valued at £850m, but despite the high price tag the US groups have not been put off.

Independent analyst Nick Bubb said : “Whether the US private equity funds have more money than sense remains to be seen.”

So why are the Americans so interested in the UK value chain?

Some of the private equity groups in the mix have experience in the value market. KKR has invested in Dollar General while Bain Capital acquired Dollarama, the largest dollar store chain in Canada, in 2004.

Bain Capital bought Dollarama when it had just over 300 shops. According to the firm’s website Bain Capital helped to switch Dollarama from a single price point model to a multiprice point model, allowing it to expand the product range. Bain Capital grew the retailer’s stores to 680 and then led the company to an IPO in 2009.

But, according to the experts, the value sector in the US is now mature and the potential for growth in Europe has not gone unnoticed with such a range of retailers including Poundworld, Poundstretcher, Home Bargains, 99p Stores and Poundland.

Shore Capital analyst Darren Shirley said: “They can see the good growth opportunities for the value retailer, not just within the UK but how they have expanded to Europe and opportunities for continental Europe.

“The discounters are creating a category rather than being squeezed by the impacts of the recession.”

Since the recession hit UK shoppers turned to value retailers in droves. For that reason value retailers embarked on rapid expansion across the UK and also improve their product ranges in a bid to steal market share from all kinds of retailers including supermarkets.

Verdict analyst Patrick O’Brien said: “Discount retailers are here to stay. The feeling a few years ago may have been that the growth in pound shops was fleeting and that shopping trends would revert back to former consumption eventually but it seems there has been a change in attitude and austerity is the new norm.”

B&M has shown rapid growth since the Arora brothers acquired it in 2004. Sales are now over £700m from £70m eight years ago, while pre-tax profit hit £51.7m in 2011. It is phenomenal growth and the retailer has further plans to keep growing with, for example, its first overseas store soon.

And B&M is not alone in its ambitious plans in the value sector. TJ Morris, which trades as Home Bargains, has been named by Shore Capital’s Clive Black as “best in class” out of the value sector, while Poundland is also being tipped for a sale after appointing former Tesco executive Andrew Higginson as its chairman. Poundland has frequently spoken of its plans to expand overseas.

Indeed, the attraction of the value sector is so strong that high profile US investment failures in the UK retail sector haven’t put them off. Examples across the last year include big box electricals retailer Best Buy, which was forced to pull out of the UK, scrapping 11 of its stores when it realised the UK market was tougher than expected. And more recently Dick’s Sporting Goods lost £19m of investment in collapsed sports retailer JJB.

Shirley said: “Poundland is already owned by a big US backer, Warburg Pincus, so the seeds have already been sowed among the US investors and with B&M being up for sale they are pushing on an open door.”

Americans love a bargain it seems.