M&S taps investors and cuts dividend to fund Ocado deal

[February 27, 2019]   By James Davey

LONDON (Reuters) - British retailer Marks & Spencer (M&S) will raise cash from investors and cut its dividend to finance a joint venture with online supermarket pioneer Ocado that will give M&S a long-anticipated full online food delivery service.

M&S, Britain's best-known stores group, said on Wednesday it would buy a 50 percent share of Ocado's UK retail business for up to 750 million pounds ($994 million), financed by a 600 million pounds rights issue of shares and a 40 percent cut to its dividend.

Shares in M&S were down 9.6 percent at 1056 GMT, reflecting the equity increase, the dividend cut and fears it may have overpaid, while Ocado's were up 4.3 percent. Both stocks rose sharply on Tuesday after talks between the companies were confirmed following months of speculation.

"We think (M&S) is paying a high price which reflects it being very late to the (online) party," said RBC Europe analyst Richard Chamberlain.

M&S CEO Steve Rowe dismissed the suggestion that Ocado, led by Tim Steiner, had got the better of a deal that values the joint venture at 1.5 billion pounds.

"We think we're paying a fair price and I think Ocado do too," Rowe told reporters, adding the deal "transforms the UK food online market".

As well as the retail joint venture agreement, M&S will effectively become a technology customer of Ocado.

"Not only have M&S paid a lot of money for 50 percent of the new JV entity, that new JV will also feed the hungry (Ocado) technology business," said Bernstein analyst Bruno Monteyne.

The joint venture will trade as Ocado.com from September 2020 at the latest, following the termination of Ocado's current agreement with upmarket grocer Waitrose, which has supplied a large part of the products sold by Ocado since its inception.

Waitrose, owned by the John Lewis Partnership, confirmed its near two decade long arrangement with Ocado would end. Waitrose will focus on its own online business, which it said last year it aimed to double in size within five years.

RAPID GROWTH

Online shopping is Britain's fastest growing grocery category. It is expected to grow by 52 percent over the next five years to 17.3 billion pounds, according to industry researcher IGD.

While Ocado has just a 1.3 percent share of Britain's total grocery market, its 7 billion pound-plus stock market valuation has been driven by the technology side of its business - providing retailers with the infrastructure and software to develop their own online grocery businesses to compete with tech giants such as Amazon.

Founded by three Goldman Sachs bankers 19 years ago, Ocado struggled for years to make a profit but has been transformed in the last year by major technology deals with retailers including U.S group Kroger Co and France's Casino.
 

 A man walks from the main reception of the Ocado CFC (Customer Fulfilment Centre) in Andover, Britain May 1, 2018. REUTERS/Peter Nicholls/File Photo

M&S, a 135-year-old clothing and food chain, is a mainstay of Britain's shopping streets but has been slow to adapt to the rise of fast fashion, discounters and online shopping.

It currently sells wine, flowers and clothes online, but does not offer a full delivery service for its food, putting it at a disadvantage to rivals, including Britain's two biggest supermarket groups Tesco and Sainsbury's.

Some analysts are wary of the M&S brand's ability to make the online economics work, given its bias to convenience shopping and special occasions.

Only last month, Rowe said M&S' basket size was not appropriate for a full online grocery service, noting 41 percent of its customers shop for "today/tonight".

He struck a different note on Wednesday.

"We think our products, combined with Ocado's own brand and their extensive range of other branded products completes that basket," he said.

The joint venture will offer more than 50,000 different grocery items to shoppers - a combination of M&S’s branded range and Ocado’s own label and third party branded products.

Analysts at Peel Hunt said the key questions were how M&S product would be received by existing Ocado customers and how quickly M&S core food shoppers would log on.

"We are positive on both questions," they said.

For Ocado, the deal is a boost after a devastating fire this month at its flagship robotic distribution center.

M&S and Ocado said that for the year to Dec. 2 2018, the joint venture would have generated revenue of 1.47 billion pounds and core earnings of 34.2 million pounds.

M&S said the deal would provide potential synergies of at least 70 million pounds a year.

It also said current trading was in line with the board's expectations.

(Reporting by James Davey; Editing by Keith Weir and Mark Potter)

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