It will go ahead with the Competition and Markets Authority’s (CMA) Phase II review, which is an in-depth 24-week study of the deal expected to report by October.
The planned merger, announced in February, would create a network of 800 shops.
Last month the CMA’s Phase I review found the proposed merger could mean ‘’substantial lessening of competition in 80 local areas where the companies overlap’’ and 12 where they would compete ‘’in the near future’’.
The CMA told Poundland it would refer the deal to a more in-depth inquiry unless ‘’acceptable undertakings’’ were made.
The watchdog did not specify the undertakings, but in previous similar cases this has meant selling stores.
The in-depth review will allow Poundland to put its case to a CMA panel. It asked the CMA for a three-week delay before either deciding to go ahead with the longer review, or scrapping its merger proposals altogether.
But Poundland chief executive Jim McCarthy today said: “We look forward to working with the CMA in Phase II in order to ensure that we can deliver an improvement in choice, value and service for 99p Stores’ customers.”
A CMA spokeswoman said: “The panel might find the original decision was about right. But they could find they have more concerns than were first highlighted, or less.”
The CMA originally found that after the takeover, Poundland would only face competition from one other single-price retailer with national scale, Poundworld, as well as from other discount retailers B&M, Home Bargains, Wilko and Poundstretcher.
But Shore Capital said the UK high street is “highly competitive”, adding that Poundland “is right to see-through the undoubted potential” from an acquisition of 99p Stores.
In the last similar case in the retail sector, scrutinised by the CMA’s predecessor the Office of Fair Trading, Asda’s takeover of Netto in 2010 was cleared after it agreed to dispose of 47 stores.
The previous year, the Co-op agreed to divest 133 outlets when it bought Somerfield.
Last year, two gym operators abandoned a £300 million merger after their proposed tie-up was stalled by an in-depth competition probe.
West Midlands based Poundland had 534 stores in the UK and 39 in Ireland at the end of 2014.
Family-run firm 99p Stores sold out 14 years after it was founded with a single store in north London by entrepreneur Nadir Lalani.
It has grown rapidly in recent years following the demise of Woolworths in 2008 as bargain retailers have become regular fixtures in UK high streets.
The chain now has 251 sites, trading as 99p Stores and Family Bargains, which serve more than two million customers.
Poundland opened its first store in Burton-on-Trent in 1990. It floated on the stock market last year.