A year on from Warburg Pincus’s surprise £200m swoop for Poundland, the UK discount sector is still attracting private equity attention.

In the past week, 99p Stores has appointed advisory firm DC Capital Partners to explore the possibility of a sale, which analysts think could fetch £60m-£80m. Founder Nadir Lalani controls 50 per cent of the business, which has 133 UK stores, and Barclays Ventures has a 25 per cent stake.

Many of the discount chains remain a family affair. Wilkinson, the discount hardware chain, is now in its third generation of family ownership but this has proved no barrier to expansion and it now trades from 335 UK stores.

Poundworld, controlled by the family of former market-stall trader Chris Edwards, has 104 shops with turnover of £135m.

Rival Poundstretcher has greater ambitions to expand, recently appointing property advisers to take it from 320 to 500 stores by 2012. However, its financial record has not always been strong; parent company Instore delisted from the stock market in 2009, after branding mistakes and distribution problems caused profit warnings.

Property consultant CB Richard Ellis says the discount retail sector is one of the fastest-growing areas of the UK retail market, but analysts dispute whether the cheap and cheerful expansion can continue for much longer.

“The discount sector can’t keep growing exponentially, and has to reach saturation point,” says Helen Dickinson, head of retail at KPMG. “There is very little that differentiates these retailers, and there’s a danger that they will cannibalise each other.”

However, others look at the long-term success of US discounters such as Dollar Tree.

“It is still a relatively underpenetrated retail segment, compared to the US,” said one banker. “There is a lot of M&A potential.”

When it comes to expanding the more successful UK formats, consolidation is likely to be the way forward. But there is also scope to grow businesses by investing in transactional websites and expanding into Europe.

“Discount stores have many different formats from one country to another. The question is, can you grow them outside of their home territory?” says Michel Paris, chief investment office of PAI Partners, which has been involved with a number of retail transactions in the discount sector.

If the private equity houses have their way, perhaps thrifty shoppers on the Continent can look forward to the arrival of Euroland, Eurostretcher or 99 Cent Stores.

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