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What does the M&S Ocado tie-up mean for investors?

daniellelevy
Written By:
daniellelevy
Posted:
Updated:
27/02/2019

M&S food lovers will be pleased to hear that from September 2020 they will be able to order their favourite items online via Ocado.

As part of the deal, M&S will pay Ocado £750m to acquire 50% of the online delivery website’s UK retail business. This will include a deferred payment of up to £187.5m plus interest.

In order to fund this investment, M&S is planning to raise £600m via a rights issue. The retailer also plans to cut its dividend by 40% to support future investment and to strengthen its balance sheet. In light of this, M&S expects to pay a final dividend of 7.1p per share in 2018/19.

From September 2020, Ocado will no longer offer Waitrose’s products via its platform.

The online delivery service plans to use the cash from M&S to build more distribution centres as part of its expansion plan.

Investor reaction

So what does the deal mean for investors?

The news was received badly by shareholders in M&S – with the share price falling 9.1% to £2.75 at 10.10am.

It was a different story for Ocado, however: its share price rose by 4.5% to £10.35 at 10.10am, suggesting that investors believe that it will be the real beneficiary of the deal.

Laith Khalaf, senior analyst at Hargreaves Lansdown, explained that the sell-off in M&S’s shares is down to the retailer’s decision to cut its dividend.

“M&S has announced a big dividend cut in its announcement to shore up the balance sheet for future investment. That may well be needed to drag M&S into the twenty first century, but income investors don’t like dividend cuts of that magnitude, and are prone to dump a stock if it doesn’t continue to meet their need for a decent yield,” he explained.

He suspects the market will take the announcement of the rights issue in its stride, given that the money is going to be used to fund a positive development for the business.

For M&S, where typical basket sizes are under £30, he points out that making its food available for delivery should ultimately add value.

“By teaming up with Ocado, where basket sizes are over £100, this makes an online proposition viable,” he added.

Meanwhile, Russ Mould, investment director at investment platform AJ Bell, describes the tie-up as a “big jump forward” for M&S.

“Getting access to Ocado’s well-heeled customer base via a joint-venture could be a real plus,” he added.

Ian Forrest, investment research analyst at The Share Centre, added: “On the face of it the move by M&S is a good one, although it is long overdue and the company has some catching up to do.”

What does the deal mean for Ocado?

The joint venture represents even more of a positive for Ocado, according to AJ Bell’s Mould.

“The deal with M&S to provide its technological services is a further affirmation of its prowess in this area, and supports the investment thesis for the stock that this is not a marginally-profitable online grocery delivery service but a technology company that licences out its software, skills and expertise,” he said.

The deal will also provide Ocado with funds to invest in its distribution network and fulfil the international partnerships it has signed in recent years.

Khalaf believes the deal makes sense for both parties and hopes it will “enable future growth”.