M&S knocks FTSE as Ocado deal sparks cash call and dividend cut

M&S offered the online supermarket £750 million to own half its UK retail business, £600 million of which will be funded by the rights issue.

The retailer is also cutting its dividend, with this year’s final payout falling to 7.1p, down from 11.9p last year. That will take total dividends for the year to 13.9p, down from 2018’s 18.7p.

The deal will see M&S food and general merchandise become available on Ocado’s website from September 2020, replacing the online grocer’s current deal with Waitrose.

The Ocado Smart Services platform will support the joint venture and the business will use the cash from M&S to build more distribution centres as part of its international expansion.

Laith Khalaf, senior analyst at Hargreaves Lansdown, said: ‘This deal is a case of the old meeting the new. M&S has clearly decided if you can’t beat them, join them, and in a digital age it simply can’t afford to ignore the online audience for food.

‘For both parties the deal makes sense, and is a positive move that will enable future growth. The dividend cut is a sting in the tail for M&S investors however.’

He added that Metro Bank (MTRO) provided a clear example as to how damaging a rights issue can be to the share price of a company.

The high street bank saw its shares plummet 20% to £10.43 after rushing out its full-year results last night in bid to comfort investors over a £350 million cash call, triggered by an accounting error last month.  

The shares are down 32% since Bloomberg reported the rights issue yesterday afternoon.

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Metro Bank chief executive Craig Donaldson assured there was ‘no question marks’ over the bank’s future, despite the bank finding it was more exposed to higher-risk mortgages than its loan book showed.

‘We have flagged various concerns with the Metro Bank investment case in the past,’ stated an analyst note from broker Goodbody. ‘At a fundamental level, we have an issue with the economics of the business model, i.e we do not believe that Metro Bank’s strategy is revolutionary or that it denotes competitive advantage.

‘We see substantive difficulties for the bank in the context of generating a return on tangible equity at or near its cost of equity. We see this as the overarching negative point attached to the investment case.’

ITV (ITV) shares also took a hit this morning, down 4.4% to 125.5p, after the broadcaster predicted a 4% fall in advertising revenues in the first quarter of 2019. Full-year earnings were down 4% to £810 million, with margins shrinking from 27% to 25%. However, revenues from its production company ITV Studios were up 6%.

ITV also announced it was teaming up with the rival the BBC to take on Netflix and Amazon with a UK subscription-based streaming service BritBox.

AJ Bell investment director Russ Mould said he could understand the attraction of the deal for ITV as it looks to wean itself off reliance on TV advertising.

‘The joint venture has already enjoyed a successful pilot in the US and given the wealth of content both parties bring to the table you can see it having a decent pull for viewers,’ he said. ‘However, the regulators still need to sign off on the plan – with the BBC’s status as a public service broadcaster a possible sticking point.

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‘The platform will require significant investment, particularly if the partners are to follow through on plans to create new content for the BritBox platform. Spending by Netflix on original content is projected in some quarters to hit $15 billion in 2019.’

St James’ Place (SJP) was another FTSE 100 faller, with shares down 2.7% to 949.6p, after the wealth management business warned of slowing inflows. It recorded a 14% increase in profits in 2018, with a 9% rise in new business profit for 2018, down from 50% in 2017.

Shares in Rio Tinto (RIO) rose 16p to £44.02, after the miner announced a $4 billion (£3 billion) special dividend, equating to $2.43 per share, on top of the $3.07 full-year ordinary dividend.

This followed better than expected full-year earnings, with revenues up $500 million to $40 billion and earnings up 2% to $8.8 billion.

The FTSE 250 was also in the red, with Ted Baker (TED) joining Metro Bank at the bottom of the ‘mid-cap’ index, down 10.8% at £17.83.

The clothing retailer warned of a £10 million hit to full-year profits, blaming currency movements, additional product costs from a systems upgrade and a £5 million write down of aged stock in Asia and the US.

The pound continued to strengthen following yesterday’s rally, breaching $1.33 against the dollar.



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