The timing of Ocado’s profits warning couldn’t have been worse.
In the week that it should be basting the turkey, metaphorically speaking, it’s cleaning out the fridge, as the full extent of its capacity constraints and problematic upgrades come home to roost.
Having witnessed at first hand the amount of manual labour that’s been brought in to tide over Ocado following these upgrades, I can understand how costs have shot up. Not unfairly, analysts have also speculated there may be more to this than meets the eye. Conditions have worsened, after all, and Ocado is more exposed to the headwinds, as it’s so much smaller than its rivals.
Whatever; with the company’s valuation at £280m (the share price today is 54p), it’s now potentially a takeover target for Marks & Spencer, Morrisons and Amazon, should they be interested.
And they surely must be now. The last time a possible bid was rumoured, in February, the share price shot up to 290p, valuing the Hatfield-based ops at a jaw-dropping £1.5bn. Not surprisingly, Morrisons et al walked away.
But 10 months on, with a profits warning coming amid slowing sales growth, Ocado is a very different proposition, acquisition wise, with its current valuation lowered to roughly £130-£180m after you factor in the £200m cash it raised, most of which still sits on its balance sheet. That’s only double what Morrisons paid for Kiddicare. And even if growth has slowed, sales are still growing 15%.
While it would cost £50m to terminate Ocado’s Waitrose tie-up, this would be a walk in the park compared to the proposed Iceland acquisition, say, which would involve decoupling complex leases, and multiple sell-offs – as well as a huge price tag. Plus there’s no certainty that a buyer would even secure the business if it could be bothered with a serious bid.
I understand Morrisons has as good as ruled out online grocery retailing, despite publicly insisting that it is still experimenting with various trials. That was before the Ocado share price started plummeting. An off-the-shelf internet shopping solution at a knock-down price might encourage CEO Dalton Philips and his FD Richard Pennycook to think again. Think of what Morrisons’ buying power could bring to the Ocado model. It would also have instant penetration into the Home Counties.
In the meantime, for M&S, a deal would give them a major leg up into online food, unencumbered by legacy costs. Sir Stuart Rose was ready to pay a lot more than this for the business a couple of years ago. Marc Bolland today talks regularly about multi-channel. And with Ocado looking to develop a food emporium-based model over the next 12 months, the fit with M&S as the upmarket food and drink retailer par excellence would be superb.
And finally there’s Amazon. It entered the UK market without much conviction in 2010. But the arrival on these shores of its US chief this autumn suggests Amazon is taking the UK very seriously. Owning Ocado’s IP would also allow it to apply its learnings elsewhere in the world.
The only thing that could stand in the way of an acquisition would be its long-term investors. The biggest stakes are owned by Jorn Rausing, the Tetrapak billionaire, and star fund manager Nicholas Roditi, and they have always been rich enough to take the long-term view, so they wouldn’t want to be selling off Ocado on the cheap. On the other hand, their world view might have changed in these last harrowing months.
And certainly UBS, another major stakeholder in Ocado, is less likely to be bothered. What sort of premium would pique its interest? Does 100p per share look attractive? At almost double the current price, it’s a lot more attractive than it looked than when the share price was six times higher in February.
Having seen the general direction of travel in the wider markets, Ocado’s vulnerability in the markets is obvious. A situation like this can quickly unravel.