Bumpy road ahead for M&S-Ocado joint venture, analysts predict

In a bearish note, Whitman Howard called the deal “the first stop in the likely long and unprofitable development of national online coverage for M&S’s food business”, and a “necessary but essentially defensive stop that will result in M&S’s cost of operations increasing permanently”.

Under the terms of the deal, leaked on Tuesday and announced on Wednesday, M&S has agreed to pay up to £750m for certain assets and rights in a 50:50 joint venture with the online delivery specialist. It means Ocado’s long-standing relationship with Waitrose will come to an end in 2020, with product after that being provided by Ocado and M&S.

M&S is funding the deal through a £600m rights issue and 40% dividend cut.

Whitman analysts pointed out a number of issues, including the decision for the joint venture to trade as Ocado.com, “which seems odd to us for a brand with the supposed strength of M&S’s food business”. It said Ocado will need more customer fulfilment centres and that the joint venture will need a proprietary branded business.

They added: “We can see that the joint venture will be unprofitable for some extended period as the initial years of operation are also likely to be burdened by immaturity and set up costs.”

Concluding that the dividend cut plays to its view that M&S is in the early stages of a "very long turnaround" during which profits will be "reset downwards significantly before they begin to recover", Whitman said history suggests investors are better off waiting until later stages of retail turnarounds and so kept a ‘hold’ recommendation on the stock and a price target of 250p.

Peel Hunt, however, adopted a more upbeat view. The brokerage, which has a ‘buy’ recommendation on M&S and a price target of 350p, noted that the JV would have had sales of £1.5bn and EBITDA of £34m last year and that management expects upwards of £70m of synergies to emerge.

"So it’s hard to call the deal a snip form Marks’ perspective.

“But the lack of any sense of any in-house solution to the food online problem meant that its bargaining position was always slightly compromised, and if M&S is right about the joint venture’s potential, the returns profile is satisfactory."

With the rights issue looming, Peel Hunt acknowledged that it was hard to be overly positive on the shares, "but the long-term picture has got significantly better today so we stick with the positive headline stance".

As at 1400 GMT, shares in M&S were down 10% while Ocado's were ahead 2%.