M&S taps investors and cuts dividend to fund Ocado deal

LONDON (Reuters) – British retailer Marks & Spencer will raise cash from investors and cut its dividend to finance a joint venture with online supermarket pioneer Ocado that will give M&S a full online food delivery service for the first time.

FILE PHOTO: A Marks and Spencer logo is seen on a store in London, Britain, May 23, 2018. REUTERS/Toby Melville/File Photo

Marks & Spencer (M&S), Britain’s best-known stores group, said on Wednesday it will buy a 50 percent share of Ocado’s UK retail business for up to 750 million pounds ($994 million), financed by a 600 million pounds rights issue of shares and a 40 percent cut to its dividend.

Shares in M&S were down 9 percent at 0947 GMT, reflecting the equity raise, the dividend cut and fears it may have overpaid, while Ocado’s were up 1.3 percent.

Both stocks had risen sharply on Tuesday after talks between the companies were confirmed following months of speculation.

M&S Chief Executive Steve Rowe dismissed the suggestion that Ocado had got the better of a deal, which values the joint venture at 1.5 billion pounds.

“We think we’re paying a fair price and I think Ocado do too,” he told reporters, adding the deal “transforms the UK food online market”.

As well as the retail joint venture agreement M&S will become a technology customer of Ocado.

“Not only have M&S paid a lot of money for 50 percent of the new jv entity, that new jv will also feed the hungry (Ocado) technology business,” said Bernstein analyst Bruno Monteyne.

The joint venture will trade as Ocado.com from September 2020 at the latest, following the termination of Ocado’s sourcing agreement with upmarket grocer Waitrose, which is owned by the John Lewis Partnership.

Waitrose confirmed that its near two decade long commercial arrangement with Ocado will end as it focuses on its own online operation.

“We have strengthened our own online business significantly and said last summer that we will double Waitrose.com within five years,” said Waitrose Managing Director Rob Collins.

GROWING CHANNEL

Online is Britain’s fastest growing grocery segment. It is expected to grow by 52 percent over the next five years to 17.3 billion pounds, according to industry researcher IGD.

Though Ocado has a 1.3 percent share of Britain’s grocery market, its 6.9 billion pound stock market valuation has been driven by the technology side of its business.

Its technology arm provides retailers with the infrastructure and software to develop their own online grocery businesses to compete with tech giants such as Amazon.

Founded by three Goldman Sachs bankers 19 years ago. Ocado struggled for years to make a profit but has been transformed in the last year after striking major technology deals with international retailers such as U.S. group Kroger Co and France’s Casino.

M&S, a 135-year-old clothing and food retailer, is a mainstay of Britain’s shopping streets but has struggled to cope with the rise of fast fashion, discounters and online shopping.

The firm currently sells wine, flowers and clothes online, but does not offer a full delivery service for its food, putting it at a disadvantage to rivals such as Waitrose and Britain’s two biggest supermarkets Tesco and Sainsbury’s.

Some analysts have said they are wary of the M&S brand’s ability to make the online economics work, given the firm’s natural bias to convenience and events.

Only last month Rowe said M&S’ basket size was not appropriate for a full online grocery service, noting 41 percent of its customers shop for “today/tonight”.

Rowe struck a different note on Wednesday.

“We think our products, combined with Ocado’s own brand and their extensive range of other branded products completes that basket,” he told reporters.

The joint venture will offer over 50,000 different grocery items to shoppers – a combination of M&S’s branded range and Ocado’s range of own label and third party branded products.

For Ocado the deal is a major boost following a devastating fire this month at its flagship robotic distribution center.

FILE PHOTO: A man walks from the main reception of the Ocado CFC (Customer Fulfilment Centre) in Andover, Britain May 1, 2018. REUTERS/Peter Nicholls/File Photo

M&S and Ocado said that for the year to Dec. 2 2018, the joint venture would have generated revenue of 1.47 billion pounds and core earnings of 34.2 million pounds.

M&S said the deal would provide potential synergies of at least 70 million pounds a year, achieved by the third year following completion.

It also said current trading was in line with the board’s expectations.

Reporting by James Davey; Editing by Keith Weir

Our Standards:The Thomson Reuters Trust Principles.

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