M&S shares tumble as Ocado deal spooks City: High Street chain taps investors for £600m and cuts dividend to fund £750m delivery tie-up
Marks & Spencer’s shares plunged after shareholders were spooked by its ‘extravagant’ delivery tie-up with Ocado.
In its biggest-ever deal, M&S has agreed to pay £750million for half of Ocado’s retail division, valuing the entire business at £1.5billion.
The partnership will allow M&S to deliver groceries to customers for the first time in its 135-year history.
The odd couple: Ocado chief executive Tim Steiner and M&S boss Steve Rowe
But the terms of the venture sent shockwaves through the City.
In a sign that investors believe Ocado got the better of the deal, its shares rose 2.9 per cent while M&S fell 12.5 per cent, wiping more than £600million off its value.
Neil Wilson, analyst at trading platform Markets, 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.’
M&S is now preparing to tap shareholders for £600million – its first rights issue – to fund the deal, which still needs to be signed off by Ocado shareholders.
19 years in the making
M&S’s grocery delivery service is the result of 19 years of talks with Ocado.
At 6.05am yesterday, a deal was finally done, with Ocado chairman Lord Rose having been on the phone to chief executive Tim Steiner until almost 2am.
Rose was chief executive and later executive chairman of M&S for six years, during which time current chief executive Steve Rowe was promoted to the M&S board.
But Steiner insisted he pioneered the deal with Rowe, with Rose and M&S chairman Archie Norman playing a minor role.
Steiner said: ‘He’s [Lord Rose] involved as our non-executive chairman as he should be in a major strategic transaction.’
Rowe said: ‘We should have done it earlier. It is fortuitous Tim and I have found a solution to create this exciting venture.’
It will also slash its full-year dividend by 40 per cent to 7.1p per share, the first time it has been cut in a decade.
By contrast, Ocado is being handed £750million to plough into the flourishing technology business behind its robot-powered warehouses.
Paul Mumford, a fund manager at Cavendish Asset Management, which owns shares in M&S, added: ‘Compared to Sainsbury’s and Tesco, M&S clearly can’t compete when it comes to customers’ weekly shops.
‘And whichever way you look at it, raising £600million to invest in a joint venture which may or may not work seems an extravagant use of shareholders’ money.’
But M&S chief executive Steve Rowe insisted the deal was positive for all. ‘This is not a gamble,’ he said.
‘The point that people are missing is this is not just the money that’s going on the joint venture. That’s one element of it.
‘The £70million a year, at least, that we will make in the M&S business through synergies and efficiencies is substantive and does add shareholder value.
‘The share price [reaction] has been in response, as much as anything, to the fact there is a rights issue and a movement down in the dividend. This is really the only way M&S could have moved food online.’
M&S is fighting to grow sales and profits as more customers go online. It wants a third of its business to be online within three or four years and to revive ailing sales after a dismal Christmas.
At least 100 M&S stores are being axed as it races to turn around its disappointing performance.
Tim Steiner, chief executive of Ocado, suggested the deal could increase the number of M&S shops.
It is the first major transaction to be signed off by M&S under the leadership of Rowe and chairman Archie Norman.
Despite talks between M&S and Ocado going back as far as 2000, Rowe denied that he had wasted time. ‘I have always said we will not go online if it was unprofitable to do so and destroyed shareholder value,’ he said.
‘I’ve been trying to find the right way to do it to enhance shareholder value.
‘I believe the joint venture with Ocado is a long-term proposition, is transformational and does add shareholder value.
‘I prefer to be criticised for not being robust in my decision-making, rather than it be said I dilly-dallied. I don’t think I dilly-dallied.’
Waitrose looks to double online sales
Waitrose has pledged to double its online sales within five years after losing its contract with Ocado.
The grocer, which is owned by the John Lewis Partnership department store group, will welcome thousands more customers by next year as it builds its second warehouse for online shopping. Managing director Rob Collins said: ‘We have strengthened our own online business significantly and said we will double Waitrose.com within five years.
‘In future Waitrose.com and our shops will be the exclusive places in the UK to buy Waitrose & Partners products.’
Ocado’s tie-up with Marks & Spencer will bring Waitrose’s contract with the technology firm to an end after 19 years. The pair have had a fractious relationship, with Waitrose threatening to sue Ocado in 2012 after it signed a deal with supermarket Morrisons.
Experts suggest Waitrose will struggle to keep up with demand without Ocado’s warehouses and slick deliveries. Waitrose has just one warehouse for online shoppers.