M&S buys 50% stake in Ocado.com

Online delivery specialist Ocado has agreed to sell Marks & Spencer a 50% share in its UK retail business for up to £750m.

Marks, which has net debts of £1.8bn, will slash its dividend by 40% and intends to conduct a rights issue to raise up to £600m to pay for the £562.5m up-front portion of the deal.

It will also pay a deferred consideration of up to £187.5m plus interest, payable five years after completion depending on the satisfaction of certain financial and operational conditions.

The joint venture will trade as Ocado.com but have access to M&S's brand, products and customer database from the switchover date of September 2020, as Ocado's current deal with Waitrose is being terminated. The M&S-branded food and beverage range will be combined with Ocado's existing range of Ocado own label and third-party branded products to offer more than 50,000 products.

The high street retailer sees at least £70m of potential synergies for its food business by the third year following completion from increased buying scale, harmonised buying terms, combination of existing 700,000 Ocado.com customers and expected conversion of many of the 12m Marks customers, who currently account for around a third of online grocery spend.

For Ocado, the proceeds will enable its to fully fund the development of all its current commitment of warehouses, or 'customer fulfilment centres' with clients of its Ocado Solutions business in the US, France, Canada and Scandinavia.

M&S chief executive Steve Rowe said: "I have always believed that M&S Food could and should be online. Combining the strength of our food offer with leading online and delivery capability is a compelling proposition to drive long-term growth."

He said the investment the joint-venture would give the company an online offer "in an immediately profitable, scalable and sustainable way", with the JV estimated to have made pro forma revenues of £1.5bn and EBITDA of £34.2m in the 52 weeks to 2 December 2018, with no requirement to pay the £15m sourcing fees to Waitrose.

Rowe added: "This is a transformational step forward in shaping the future of M&S and in becoming a truly digital first retailer with at least a third of the business online."

Ocado boss Tim Steiner said: "We are delighted that our UK retail business will become a joint venture with M&S. This is a transformative moment in the UK retail sector with the combination of two iconic and much-loved retail brands set to provide an unrivalled online grocery offer."

It will mean that Ocado will be more focused on its Ocado Solutions business, which licences out its online grocery delivery platform, backed up by robot-operated depots.

Steiner said the JV was "the best outcome for our Ocado Solutions partners, creating a stronger platform from which to innovate and develop our unique and proprietary technology" and also provided a "further endorsement from another leading global retailer" as well as providing value for shareholder by "unlocking the significant value embedded in Ocado Retail".

"The combination of Ocado and M&S will allow us to grow faster, add more jobs, and create more value, as we lead the channel shift to e-commerce here in the UK. We are very excited by the many opportunities ahead."

There was some immediate scepticism in the City.

M&S’s purchase of Ocado’s UK retail business "looks rather like one of its own ready meals – expensive, not very good for you but easy, quick and ready to heat up", said Neil Wilson chief market analyst for Markets.com.

Wilson added that investors may have been happy with the deal outline yesterday, as the shares rose 4%, but "won’t be too chuffed" by the board cutting the dividend 40%.

He raised the industry concern about M&S's extremely small basket size relative to other big supermarkets, which are significantly below the current Ocado minimum for delivery, and queried whether M&S will be able to retain the current Ocado customer base, who have gotten used to Waitrose products. "There is a high risk of customer leakage as consumers rotate to Waitrose’s in-house delivery service."

For Ocado Wilson sayd this is another win. "It frees it up to focus on the tech side and its robots and securing new deals with international partners, whilst retaining one foot in its domestic retail market. Another blinder from Steiner."

Independent retail analyst Nick Bubb said the deal was "very puzzling", particularly as Ocado's recent Andover fire "had seemed to put the whole talks on the back-burner".

"It may be understandable that Ocado wanted to ditch Waitrose and give 18 month’s notice on their supply contract, but it is hard to understand why M&S want to buy into the existing Ocado distribution infrastructure (which services Morrisons etc), at a cost of at least £750m, rather than just become a new partner."

He added that it seems a "huge leap in the dark" for M&S.

Jefferies senior bond analyst Stephen Lienert said for Ocado the tie-up "only adds value in our view" as it "eliminates all debate of what would happen if/when Waitrose left, which we know they will do so now".

He added: "Ocado therefore goes full circle: whereas before people used Ocado to access Waitrose products, now the supermarkets want to use Ocado. Waitrose talks a good game about their own website, but that is now a contrarian view vs ICA, Krogers, etc.

"If you are looking for a safe long in 2019, Ocado is on that list, in our view."