Marks & Spencer has formed a £1.5bn online delivery joint venture with Ocado to bring M&S’s ready meals, food hall favourites and Percy Pig sweets to internet shoppers for the first time.
M&S will pay £750m for a 50% share of Ocado’s UK retail business to form the new business, which will trade as Ocado.com. The venture will not start trading until September 2020 at the latest, when Ocado’s present deal to deliver Waitrose products expires. Only 10% of the products on sale at Ocado.com will be M&S-branded goods.
M&S shares fell 7% in early trading after the details of the deal were announced. Marks & Spencer will launch a £600m rights issue and slash its dividend payout to shareholders by 40% in order to fund the deal. Ocado’s shares rose 6%.
Steve Rowe, Marks & Spencer’s chief executive, said he had “always believed that M&S Food could and should be online” and combining M&S’s food with Ocado’s technology and delivery network was a “win-win” and “compelling proposition to drive long-term growth”.
He added: “Our investment in a fully aligned joint venture with Ocado accelerates our food strategy as it enables us to take our food online in an immediately profitable, scalable and sustainable way.”
Tim Steiner, the chief executive of Ocado, described the deal as a “transformative moment in the UK retail sector” that would combine “two iconic and much-loved retail brands set to provide an unrivalled online grocery offer”.
Some analysts suggested M&S had overpaid for its share of the venture but Rowe said on Wednesday: “I believe we paid a fair price.”
Neil Wilson, the chief market analyst at Markets.com, said: “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.”
Steiner said the much-rumoured deal was not signed until 6am on Wednesday morning and was announced to the market at 7am. He said he thought M&S customers would be particularly “looking forward to having their Percy Pigs at home”.
Steiner said the joint venture would allow Ocado 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.” He said exiting the current deal with Waitrose would save Ocado £15m a year in fees for the retailer’s branded goods.
M&S will pay £562.5m in cash upfront and a further £187.5m (plus interest) five years after the deal completes. Goldman Sachs bankers, including Sir Martin Sorrell’s son Mark Sorrell, advised Ocado on the deal. Steiner was a Goldman banker until he quit to create Ocado in 2000. M&S was advised by Rothschild.
Nick Bubb, an independent retail analyst, described the deal as “very puzzling” and a “huge leap in the dark” for M&S. “It may be understandable that Ocado wanted to ditch Waitrose and give 18 months’ 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.
“Rowe has the nerve to say: ‘I have always believed that M&S Food could and should be online’ but M&S still haven’t proved that they can generate a high enough shopping basket to make online grocery pay, so this seems a huge leap in the dark for them. Shareholders are being tapped for a £600m rights issue, at the same time as M&S has casually ‘reset’ its dividend downwards by 40%.”