In for a pound

Poundland was sold for a punchy ten times earnings yesterday, the latest in a series of private equity deals including Pets at Home, DFS, Hobbycraft and Card Factory. The buyout houses clearly are back in business and seem to have money burning a hole in their pockets, exemplified by the fact that US fund Warburg Pincus felt moved to submit a knockout offer for Poundland to secure the deal before the formal sale process had even started.

Having been out of the market all last year because they couldn’t get the debt they needed to do deals, they’re making up for lost time and taking advantage of the banks being open for business again. All the five deals mentioned above are very good specialist retailers with clearly defined niches and where the current owners have left the buyers plenty of headroom for growth going forward. There will be more of these deals to come as the year continues.

One thing Poundland could never be accused of is being expensive, except in this particular case. But Warburg Pincus clearly sees it as good value because of the potential for growth. I’m a big fan of the business and the general sniffiness which surrounded pound shops has dissipated as they’ve slid seamlessly into the gap left by Woolworths, and then people try them and find they’re not so bad.

I wouldn’t consider myself a typical pound shop shopper by any means, but I’ve lost count of the number of rainy days when I’ve ducked into the Poundland in Brixton for a £1 brolly, and often ended up picking up a book (including recently Dylan Jones’s series of interviews with David Cameron, which clearly wasn’t a big seller) or six-pack of my favourite Seabrooks crisps while I’m there. The store is cramped and the queues are often long, but its not hard to see the secret of Poundland’s success when you pop into the M&S a couple of doors away and a seemingly identical umbrella costs £8.

The value end of the market is a crowded place but what you need to make it work there is scale and with 260 stores Poundland has that. Under the likeable but no-nonsense former Sainsbury’s convenience chief Jim McCarthy, I suspect we’re going to see its very rapid growth accelerate further over the next few years.