South Africa's Steinhoff has bought 23 percent of Poundland and is considering a full cash bid for the British no-frills homeware chain in its latest attempt to expand in Europe.
Steinhoff, a $22 billion furniture conglomerate which has lost out in two high profile takeover battles already this year, said on Wednesday it had acquired 22.78 percent of Poundland, which sells every item at a single price point of 1 pound.
Under UK takeover rules, Steinhoff has until July 13 to announce a firm intention to bid for all of Poundland, whose main shareholder had been private equity firm Warburg Pincus, which said on Tuesday it had sold down its 15 percent stake.
Steinhoff, which has lost out to rivals in two battles for Britain's Home Retail and France's Darty in the last three months, bought just over 61.2 million Poundland shares, which would be worth around 120 million pounds at the closing price. Poundland has a market capitalisation of around 537 million pounds ($761 million).
Poundland shares closed up 2.2 percent higher at 200 pence, after rising around 25 percent on Tuesday. The stock is still down about 7 percent so far this year.
News of the South African company's latest move raised questions about its approach to expansion in Europe, where it already runs chains such as white goods retailer Conforama in France and furniture chain Harveys in Britain.
"There's seem to be no obvious strategic fit but it might just be a matter of adding discounted chains to its stable because that's essentially what they are: a discount retailer," said Vestact's Sasha Naryshkine in Johannesburg.
South African retail mogul Christo Wiese, Steinhoff's chairman and biggest shareholder, told Reuters he was interested in Poundland because it would be a "good fit" for Steinhoff, adding it had a disciplined approach to acquisitions.
Steinhoff, which sells beds and cupboards to lower-income shoppers in Europe, southern Africa and Asia, is keen to expand further in Europe, where pressure on consumer income has made German's Aldi the continent's fastest growing supermarket chain.
Poundland, which is due to report annual earnings on Thursday, would give Steinhoff a company with more than 900 shops in Britain, Ireland and Spain but also one whose 1 billion annual sales have been under pressure.
Poundland's 2015 purchase of rival 99p Stores for 55 million pounds has raised questions over its price model.
"Although Steinhoff has a proven track record of integrating businesses and improving their margins over time, we would see this acquisition as higher than average risk given the increasingly crowded UK variety discount space," said RBC Europe Ltd's analyst Richard Chamberlain.
Poundland, which competes with B&M, Home Bargains and Wilko and Bargain Buys, told shareholders to take no action, noting that there was no certainty an offer would be made.
Warburg Pincus originally listed Poundland in March 2014 at 300 pence per share.
($1 = 0.7059 pounds)